Transaction Costs: Definition, Examples, Analysis

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Everyone is familiar with the term ‘costs’. In business, there are all sorts of costs – from the cost of goods sold and the cost of marketing and sales to the cost of employee benefits and the cost of occupancy. But what about transaction costs?

Transaction costs are a unique type of cost that businesses incur whenever they exchange goods or services. Business owners need to be aware of these costs and take them into account when making decisions about exchanging goods or services. In this article, we’ll take a look at transaction costs are some examples, and the different types of costs that fall under this category.

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Definition of Transaction Cost

Transaction costs are an economic term that refers to the cost of participating in a market. It is a type of fee that is paid in order to engage in a transaction. Simply put, it is a payment that banks and brokers charge for their participation in a transaction. Even when you buy real estate or insurance and take assistance from an agent, you have to pay commission to him/her. That can also be considered as a transaction cost.

Examples of Transaction Cost

The following are examples of transaction costs

  • Brokers’ fees for buying or selling stocks on the stock market. A broker is an intermediary who helps you purchase, sell and manage your investment portfolio. The fee you pay the broker will be considered as a transaction cost.
  • The average transaction cost for a mutual fund in the USA is around 1.45%. It is divided into many categories such as management fees, 12b-1 fees, and operating expenses.
  • The cost of exchanging one currency for another is known as the foreign exchange rate or Forex rate. When you convert your British pounds into Euros, for example, you will be charged a fee by the bank. This fee is considered a transaction cost.

Different types of Transaction Costs

There are basically three different types of transaction costs that you might come across.

  1. Search and Information Costs

These types of costs are associated with finding and obtaining information about a certain company or security. It may also include the cost of notarizing documents as well as the cost of getting opinions from experts such as legal counsel, tax consultants, and investment advisors.

  1. Bargaining Costs

This includes all those expenses you incur while seeking to negotiate a deal including hiring legal representation if necessary. It also includes the costs associated with evaluating each competing bid.

  1. Policing and Administration Costs

These types of costs are related to ensuring that all the rules and regulations are followed during the transactions like making sure there is no fraud involved, preventing embezzlement or theft. If you’re buying a property on your own, you might need to hire a lawyer or an inspector. These types of costs fall into the category of policing and administration costs.

Conclusion

As you can see, there are a variety of different costs that fall under the category of transaction costs. Business owners need to be aware of these costs and factor them into their decisions whenever they’re exchanging goods or services. By understanding transaction costs, you can make wiser choices and save yourself some money in the process.

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