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Transaction Costs

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Transaction costs are costs incurred to complete a financial transaction. In financial markets, the primary transaction costs are commissions paid to brokers for trade execution. Other transaction costs include paying the spread, or the difference between what it costs to buy an asset and what the asset can be sold for. Transaction costs become increasingly important the shorter the holding time of an investment.

Many market models ignore transaction costs, assuming instead that markets are frictionless. While not strictly true, for many applications transaction costs are low enough that they can be ignored. The lower the transaction costs, the more efficient a market is said to be. Stock and foreign exchange markets have the lowest transaction costs of any major asset class.



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