Transaction cost

What it costs to trade rather than to hold: commission, the spread between buying and selling prices, any tax on the trade itself, and the price movement a large order causes.

Example

A fund that turns over its whole portfolio each year pays these costs on every holding, and they sit outside the fund's quoted expense ratio.

Important

These are usually excluded from the headline annual cost figure because they vary and cannot be known in advance - so that figure is a floor, not a total.

Related terms

• Expense ratio — The annual fee a fund charges, expressed as a percentage of the money you have in it.
• Bid-ask spread — The gap between the highest price a buyer will pay and the lowest a seller will accept. A cost paid on every round trip.
• Portfolio turnover — The proportion of a portfolio bought and sold within a year. Zero means nothing was sold; one means roughly the whole portfolio changed hands.

Lessons that explain it

• A round trip through an auction house can cost 40 percent before the item has moved at all — Buyer's premium going in and seller's commission coming out compound into a breakeven hurdle most buyers never calculate - on top of holding costs and, in several jurisdictions, a higher tax rate reserved specifically for collectibles. This lesson is general information, not personal tax or legal advice, and rules vary by jurisdiction. (13 min)
• Total loss is an outcome here, not a tail — Four separate routes lead to zero, none of them exotic. Then the volatility arithmetic, the costs nobody totals, and a tax treatment that can leave a bill in currency against a position that has already fallen. (13 min)
• The headline sale price is not what investors receive — Proceeds from a sale flow through debt, transaction costs, preferences, escrow and earnouts before reaching each shareholder. The waterfall decides what a headline price is worth to you. (13 min)
• The cost you can read, the costs you cannot, and the tax bill you did not choose — Four layers of cost sit behind one printed number, and a fund's own trading can hand you a taxable event on a position showing no gain at all. (13 min)
• Three instruments that happen to share an underlying asset — Owning a building, owning a listed property company and owning a slice of somebody else's deal are not three versions of one investment. They differ in almost everything except the bricks. (10 min)
• Gross yield is not a yield — Rent divided by price is the number every listing quotes and no owner receives. Take the five deductions out and Property P's 8.00% becomes 4.264% - and the two halves of the return turn out to be far less connected than they sound. (12 min)

All 578 terms in the Investing glossary