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 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.'
Round Trip Transaction Costs Explained
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