Transaction Cost

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.

Common transaction costs are:

searching for information, such as where to buy something and where the best price is

bringing the parties together to negotiate, which can be difficult if there are many parties

bargaining for an agreement by both sides

enforcing the agreement and suing if necessary

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:

Transaction costs = fixed costs + variable costs

Fixed costs = commissions + transfer fees + taxes

Variable costs = execution costs + opportunity costs

Execution costs = price impact + market timing costs