What are transaction costs?

Transaction costs are everything paid when buying or selling an investment on top of its price. They are separate from running costs such as a fund's TER, which are charged for holding an investment. Small on each trade, they add up with frequent trading and can take a noticeable share of long-term returns.

What they include

Order fees: the broker's commission per trade — a fixed amount, a percentage, or both.
The bid-ask spread: the difference between the price at which the market sells and the price at which it buys. About half of it is paid, invisibly, on each trade.
Exchange and third-party fees, charged by some brokers for particular exchanges.
Transaction taxes: some countries charge a tax on share purchases, such as France, Italy and the United Kingdom.
Currency conversion: buying securities in a foreign currency can add an exchange margin.

The formula

The cost of a round trip — buying and later selling — as a share of the amount invested is roughly:

c_{\text{round trip}} \approx \frac{2f}{V} + s

where $f$ is the fixed order fee per trade, $V$ the amount traded and $s$ the relative bid-ask spread, half paid on the purchase and half on the sale.

A simple illustration

An investor buys and later sells €2,000 of an ETF, with an order fee of €5 per trade and a spread of 0.10%:

c = \frac{2 \times 5}{2{,}000} + 0.10\% = 0.50\% + 0.10\% = 0.60\%

The same round trip with €20,000 costs only 0.15%. With €500 — a typical small monthly purchase at a broker that charges per order — it costs 2.1%. Fixed fees weigh most on small orders.

How much of a return they take

The yearly drag on returns depends on how often a portfolio is turned over:

\text{Yearly cost} \approx \text{Turnover} \times c_{\text{round trip}}

A portfolio that replaces all its holdings once a year at a round-trip cost of 0.6% loses 0.6% of its return every year to trading alone, before any running costs. Over 30 years, at 7% a year before costs, that alone reduces the final value by about 15%.

How to keep them low

Trade less: fewer, larger trades cost less than many small ones.
Use savings plans at brokers that offer them free or cheaply for small regular purchases.
Trade liquid investments during main trading hours, when spreads are narrowest.
Avoid unnecessary currency conversions by choosing listings in euros where they exist.

A worked example

Worked through on a sample portfolio. The figures below are that portfolio’s, not yours.

How much have fees reduced my returns?

I show your total fees and taxes to date as 0,00 €. That amount is the absolute reduction applied to your portfolio returns; your reported total gain is +23.302,52 € and total return is +40,46%.

In other words, fees have reduced your returns by exactly 0,00 €.

See these numbers for your own portfolio

Floreo works out every figure on this page from your own holdings — returns, risk, allocation, currencies — and the assistant explains them the way this page does. Import from your broker, or try it on the sample portfolio first.

Start Demo

The demo opens straight away on a sample portfolio — no account needed.