What are 'Round Trip Transaction Costs'

Round trip transaction costs refer to all the costs incurred in a securities or other financial transaction. Round trip transaction costs include commissions, exchange and other fees, bid/ask spreads, market impact costs and occasionally taxes. Since such transaction costs can erode a substantial portion of trading profits, traders and investors strive to keep them as low as possible. Also known as 'round turn transaction costs.'

Breaking Down 'Round Trip Transaction Costs'

The impact of round trip transaction costs depends on the asset involved in the transaction. Transaction costs in real estate investment, for instance, can be significantly higher as a percentage of the asset compared to securities transactions. This is because real estate transaction costs include registration fees, legal expenses and transfer taxes, in addition to listing fees and agent's commission.

Round trip transaction costs have declined significantly over the past two decades due to the abolition of fixed brokerage commissions and the proliferation of discount brokerages. As a result, transaction costs are no longer the deterrent to active investing that they were in the past.

The concept of 'round trip transaction costs' is similar to 'all-in cost,' which is every cost involved in a financial transaction. The term 'all-in costs' is used to explain the total fees and interest included in a financial transaction, such as a loan or CD purchase, or in a securities trade.

Round Trip Transaction Costs and Profitability

When an investor buys or sells a security, they may enlist a financial adviser or broker to do so. That adviser or broker most likely will charge a fee for their services. In some cases, an adviser will enlist a broker to execute the transaction, which means the adviser as well as the broker will be able to charge a fee for their services in the purchase. Investors will have to factor in the cumulative costs to determine whether an investment was profitable or caused a loss.

Round Trip Transaction Costs Example

Shares of Main Street Public House Corp. have a bid price of $20 and an ask price of $20.10. There is a $10 brokerage commission. If you bought 100 shares, then quickly sell all of them at the bid and ask prices above, what would the round-trip transaction costs be?

Purchase: ($20.10 per share x 100 shares) + $10 brokerage commission = $2,020

Sale: ($20 per share x 100 shares) - $10 brokerage commission = $1,990

The round-trip transaction cost is: $2,020 - $1,990 = $30

 

 

RELATED TERMS
  1. Precedent Transaction Analysis

    Precedent transaction analysis is a valuation method in which ...
  2. Brokered Market

    A brokered market involves agents or intermediaries in purchase ...
  3. Cash Transaction

    A cash transaction is an immediate exchange of cash for the purchase ...
  4. Inverse Transaction

    An inverse transaction cancels out a forward contract that has ...
  5. Off-Chain Transactions (Cryptocurrency)

    Off-chain transactions of a cryptotoken occur outside of the ...
  6. Hedging Transaction

    A hedging transaction is a position that an investor enters to ...
Related Articles
  1. Tech

    How Much Cheaper are Bitcoin Fees than Credit Card Fees?

    Bitcoin transaction fees are starting to rise as the network gets backlogged due to more usage, but are still much lower than typical credit card fees.
  2. Financial Advisor

    How Brokers Are Compensated for Selling Bonds

    Find out how brokers are paid for selling bonds and how the transaction costs are passed on to the investor through a markup or commission.
  3. Investing

    Nordea Sells 15,638 TripAdvisor Shares (TRIP, C)

    Nordea Investment Management owned 153,518 shares of travel website company TripAdvisor Inc. at the end of the third quarter of 2016.
  4. Investing

    Zacks Lowers Rating of TripAdvisor Shares (TRIP)

    Zacks has reduced its rating of shares of travel website company TripAdvisor Inc. from Hold to Strong Sell.
  5. Investing

    Coronation Cuts Stake in TripAdvisor Shares (TRIP)

    South African fund management provider Coronation Fund Managers recently sold 16,575 shares of travel website company TripAdvisor Inc.
  6. Trading

    Principal trading and agency trading

    Ever wonder what happens behind the scenes when you buy or sell a stock? Read on to find out.
  7. Investing

    The 4 Ways To Buy And Sell Securities

    Know the four main avenues of buying and selling investment instruments.
  8. Investing

    How Does Credit Suisse Rate TripAdvisor? (TRIP)

    Swiss multinational financial holdings company Credit Suisse has provided shares of travel website provider TripAdvisor Inc. with a Neutral grade.
  9. Investing

    Old National Sells TripAdvisor Shares (TRIP)

    Indiana-based bank Old National Bank sold 673 shares of travel website company TripAdvisor Inc. in the third quarter of 2016.
  10. Investing

    Miller Tabak Initiates TripAdvisor Coverage (TRIP)

    Institutional trading firm Miller Tabak recently began coverage of shares of travel website company TripAdvisor Inc.
RELATED FAQS
  1. How are open-market different from closed-market transactions?

    Legal insider transactions can take place in two ways: an open-market transaction or a closed-market transaction. Learn the ... Read Answer >>
Trading Center