what are transaction costs 
transaction costs are expenses incurred when buying or selling a good or service outside the cost of the good or service itself transaction costs represent the labor required to bring a good or service to market or to connect a buyer with a seller there are entire industries dedicated to facilitating these types of exchanges transaction costs can include things like brokers commissions and spreads which are the differences between the price the dealer pays for a security and the price the buyer pays other examples are commissions paid to professionals such as real estate agents understanding transaction coststhe transaction costs to buyers and sellers are the payments that facilitators such as banks brokers and agent receive for their roles in connecting buyers and sellers for example the fees paid to a brokerage for executing a trade are a transaction cost there are also transaction costs in buying and selling real estate which include the agent s commission and closing costs such as title search fees appraisal fees and government fees another type of transaction cost is the time and labor associated with transporting goods or commodities across long distances transaction costs are important to investors because they are one of the key determinants of net returns transaction costs diminish returns and over time high transaction costs can mean thousands of dollars lost from not just the costs themselves but also because the costs reduce the amount of capital available to invest fees such as mutual fund expense ratios have the same effect different asset classes have different ranges of standard transaction costs and fees all else being equal investors should select assets whose costs are at the low end of the range for their types ongoing fees vs transaction coststhough similar in nature ongoing fees and transaction costs are technically different ongoing fees are fees that are charged periodically over the life of the product or service these fees are typically associated with products or services that require ongoing maintenance or management such as being involved in an investment fund transaction costs are fees that are charged each time a specific transaction occurs both types of fees may be percentage based on a related dollar amount or related to a fixed dollar amount this distinction is important especially when reviewing what your broker offers though you may go to great lengths to avoid transaction costs your broker may still impose quarterly ongoing fees that can not be avoided as long as your brokerage account is open in addition there may be opportunities to forgo one type of transaction cost in exchange for an ongoing fee for instance some brokers may charge an annual fee for accounts that have no or low transaction costs sometimes it is impossible to avoid transaction costs because these costs are an inherent part of being involved in a certain market or activity when that is the case you can minimize fees and maximize your net profit through the careful choice of your broker or agent elimination of transaction costs