Question

In the presence of transactions costs, is it possible for different investors to place different values on an investment opportunity? Are there any limits on the amount that their values can differ?

Answer 1

Answer : Transaction costs are inevitable to brone by the investors and it is paid to financial adviser or broker fo consideration of service rendered to an investor.

Yes, Transaction cost will definitely impact the investor to place different values to various investment opportunities based on there transaction cost. Transaction costs are important to investors because they are one of the key determinants of net returns. Transaction costs diminish returns, and over a period of time, high transaction costs can mean thousands of dollars lost from not just the costs themselves but 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 things are equal, investors should select assets whose costs are at the low end of the range for their types.

Investor will always look to investment opportunity that reduces transaction cost and maximizes his net returns.

The following are the some of investment avenues can be divided based on their transaction involved:

1) Equity trading &Investing : Some of the most common forms of cost include brokerage charges, stamp duty, securities transaction tax and other charges.------------ High transaction cost.

2) Bond Trading : The costs you will pay depend on the market on which you buy your bonds. The difference between the price a broker-dealer pays for a bond and the price at which it is sold to you is known as the bond's markup.----------------- Comparatively low transaction cost.

3) Mutual Fund : The Mutual fund house will charge the transaction cost based on different scheme expense ratio may be equity mutual fund schemes have higher transaction cost than debt funds transaction cost.---------------- Transaction cost would differed scheme to scheme.

4) Debentures : The debentures investment doesn't involve any floatation cost to investors. hence investor will prefer to invest in debentures and maximizes net returns in long run.

Based on transaction cost investor will try to allocate or value his investment options based on transaction cost which maximizes overall return. The investor will see other parameters also like good investment advisory services, well balanced portfolio management by brokers based on these factors investor ready to incur transaction cost in order to maximize is overall net returns.

Investment value will differ based on investor willingness to pay transaction cost for an investment for a given level of return.