Chartered Financial Analyst (CFA) Level 3 2025 – 400 Free Practice Questions to Pass the Exam

The two major components of trading costs are implicit and explicit costs. Explicit costs refer to the direct costs associated with trading, such as brokerage fees, transaction fees, and other commissions that are clearly outlined at the time of the trade. These costs are tangible and easily quantifiable, impacting the total cost of executing a trade directly.

On the other hand, implicit costs encompass the non-direct costs associated with trading that might not be immediately apparent. These may include the impact of a trade on the market price (market impact cost) or opportunity costs, which consider what the trader could have earned if the capital was allocated differently. Implicit costs highlight the broader implications of trading beyond just the immediate financial outlay, making them a significant consideration in trading strategy and cost evaluation.

The other options present different categorizations of costs but do not specifically target the dual nature of trading costs as clear, measurable expenses versus those that are less tangible and require more subjective assessment.