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Transaction Cost (view source)

Revision as of 05:17, February 18, 2007

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Transaction Cost is the time, money, and effort spent to get what one wants.  For example, in order to drive to the store and buy groceries, you must first spend effort and time to earn money, then you spend that money on gas to drive to the store and when you arrive on groceries, time  is also spent driving to and from the store and shopping.
 
Transaction Cost is the time, money, and effort spent to get what one wants.  For example, in order to drive to the store and buy groceries, you must first spend effort and time to earn money, then you spend that money on gas to drive to the store and when you arrive on groceries, time  is also spent driving to and from the store and shopping.
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Common transaction costs are:
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: searching for information, such as where to buy something and where the best price is
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: bringing the parties together to negotiate, which can be difficult if there are many parties
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: bargaining for an agreement by both sides
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: enforcing the agreement and suing if necessary
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It is debatable whether taxes qualify as a transaction cost.  But in a paper by economists Collins and Fabozzi in 1991, they propose the following analysis of the transaction costs in stock trades:
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:Transaction costs = fixed costs + variable costs
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:Fixed costs = commissions + transfer fees + '''taxes'''
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:Variable costs = execution costs + opportunity costs
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:Execution costs = price impact + market timing costs
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