Understanding Transaction Costs: A Guide for Investors

Examples of transaction costs include brokers' fees and salespeople's commissions.

Most investors purchase stock through a broker. In exchange for this service, investors are charged a fee. This fee is known as the transaction cost. In other words, it is the cost passed onto the middleman for buying the stock. Some brokers charge a fee based on each transaction whereas others charge a fee based on the amount of the transaction.

Step 1

Obtain your account statement from the previous month. This should be mailed to you by your broker.

Step 2

Determine the cost of the asset you purchased. This is the market price of the asset. Let's say you purchased 100 shares of stock at $10 a share. The total cost of the stock is calculated as such: $10 x 100 = $1,000. This also will be clearly marked on your brokerage statement. Do this calculation for every purchase made and compute the total.

Step 3

Calculate transaction cost. Subtract the cost of all assets purchased from the total price paid to the broker. The difference is the cost of the transaction, which can either be broker commissions or other fees. Let's say the total charge on your brokerage statement is $1,046.88. The calculation is: $1,046.88 - $1,000 = $46.88.