Transaction Costs

Definition

Transaction costs refer to the expenses incurred when buying or selling goods, services, or assets. These costs include fees, commissions, and other charges associated with completing a transaction.

Analogy

Think of transaction costs as the "hidden fees" you might encounter when purchasing something online. Just like how you may have to pay for shipping or handling fees in addition to the actual price of an item, transaction costs are additional expenses that come with buying or selling.

Related terms

Market Efficiency: This term refers to how quickly and easily transactions can be completed in a market without significant transaction costs.

Bid-Ask Spread: The bid-ask spread is the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask). It represents one component of transaction costs.

Liquidity: Liquidity refers to how easily an asset can be bought or sold without causing significant changes in its price. Higher liquidity generally means lower transaction costs.