How do you calculate the transaction costs

Transaction costs

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“Back and forth empties your pockets”, goes a stock market adage and means that transaction fees are a not to be neglected position that can “eat up” a large part of the return if one engages in excessive trading.

But these direct costs associated with stock market trading are by no means the most important item. In many cases, the indirect costs are much more decisive, and in contrast to the direct costs, they receive little attention. You have to imagine the costs involved in trading on the stock exchange as an iceberg. Around a third is only visible, the rest of the costs “float” below the surface of the water and are not directly visible.

However, the indirect costs can also be traced and measured by breaking them down into the individual components. From this you can also derive very interesting strategic derivations for your own stock exchange trading.

  1. Direct transaction costs
    First, let's take a closer look at the explicit, direct exchange costs. Your bank charges you a commission rate for every transaction. With the two large online brokers comdirect and CortalConsors, this is 0.25% of the order volume, excluding special promotions, individual agreements and basic amounts. There are also stock exchange fees, depending on which stock exchange you are listing the transaction on. This is either a fixed amount of around € 0.95-1.50 or a percentage amount of e.g. 0.0015% for an order with comdirect via the XETRA electronic exchange.

    For an order over € 20,000, for example, commission of € 50.00 (0.25%) plus stock exchange fees of € 1.50 would be incurred. This corresponds to a cost rate of around 0.26% on the transaction. If you add the sale of the position again, the result is a total cost burden of 0.52%.
  2. Indirect transaction costs
    However, the direct transaction costs are usually not particularly painful, especially because e-commerce has caused a significant degression in costs. But as I said, the indirect costs should not be neglected. You will not receive a receipt from your bank for indirect costs; yet they are there.

    The indirect transaction costs are measured on the basis of a comparison of the return actually achieved and the return that would have been achieved with a hypothetical portfolio (paper portfolio) or model portfolio. The result is an implementation deficit that can be expressed in euros. The implementation deficit is calculated by taking into account the three other components realized profit / loss, delay costs (slippage) and opportunity costs for missed transactions in addition to the explicit transaction costs (see above).

Realized profit / loss

The realized profit / loss reflects the price difference between the actual exercise price and the price at which the decision to buy was made in relation to a comparative price that is used as a basis. Let's look at this using an example:

For example, decide to buy 1,000 shares of a share that closed yesterday at € 20.00. This is the comparison price. In a model portfolio, you would take up the shares at this price, i.e. acquire the 1,000 shares at € 20,000. With a broker commission of 0.25% and stock exchange costs of € 1.00 for the order, you would take into account explicit transaction costs of € 51.00 or 0.255%.

You now place a buy order for € 19.90 (limit order) in your real securities account. Now the share does not fall to your limit price, but closes at a price of € 20.10 (decision price). Therefore, you increase your buy limit and now come to a course of 20.15 € (exercise price) and get 800 of the 1000 shares that you wanted to buy. The remaining 200 pieces will no longer be exported at all because there was no offer at your asking price. The purchase order is therefore canceled when the price of the share was already at € 20.20 (cancellation price).

The realized loss from this transaction is now calculated as follows:

Slippage (delay costs)

The delay costs (slippage) reflect the price difference between the comparison price on the day on which the order was not executed and the actual decision price. Slippage is the price that can be attributed to a late purchase, for example because the purchase limit was set too low or the transaction was not carried out for other reasons. The calculation of the slippage, like the realized profit / loss, is also weighted according to the number of shares executed.

Missed Transaction Opportunity Cost

The opportunity cost of missed transactions basically reflects the unrealized gain or loss that arises from not executing part of the transaction. The part of the transaction that was not carried out is used as a measure.

The total amount of the transaction costs is now the sum of the explicit transaction costs, the realized profit / loss, slippage and the opportunity costs for missed transactions. In our example this would be 0.255% + 0.20% + 0.60% + 0.2% = 1.255%. With a planned total volume of € 20,000 for the transaction, this corresponds to € 251.00. If you do the same for a sale, the costs add up to 2.51% of the transaction amount, which is an order of magnitude that should not be disregarded!

As you can see, the total cost of the transaction is more than double the explicit transaction cost. More precisely, the indirect transaction costs make up 80% of the total costs in our example. The example makes it very clear how important it is to take implicit costs into account.

The question that naturally arises here is how to keep the indirect transaction costs as low as possible. Ultimately, you can only keep this low by making quick decisions on the one hand and not being too “stingy” shopping on the other. When you have found a stock that you think is suitable, you should act immediately and not put the decision on the back burner. On the other hand, you shouldn't skimp on the price too much, because the indirect costs are higher in the end if a transaction is not executed and the share rises.

Of course, one shouldn't ignore the fact that the indirect costs are also positive, that is, they can produce a profit. In particular, if the stock that is on the wish list falls, delaying entry or not buying it at all can be beneficial.

Conclusion

In addition to the points described, the market influence of an order should not be neglected. Particularly in the case of stocks with a low capitalization, a single order can ensure that other market participants become aware and trigger a wave of buy or sell that quickly brings the price in one direction or the other. Of course, this also makes your own transaction more expensive if you can get in or out of your position at a lower price.

The explicit transaction costs have become very cheap in times of the Internet and automated stock exchanges and are hardly significant any more. The indirect transaction costs are not that obvious, but they often make up a large part of the cost. Taking these into account is an endeavor that is very worthwhile, as it shows a shareholder the costs in relation to the value of his investment ideas and implementation strategy.

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