What is Market Impact Cost?

Market Impact Cost is the cost of executing a transaction in a given security with a predefined order size, at any given point in time. It is a realistic measure of the liquidity of a security and is deemed to be closer to the true cost of execution to be incurred by a trader, in comparison to the bid-ask spread (difference between the best buy and sell prices available). 

It is the percentage markup (amount added to the cost price to cover overheads and profit) observed while buying or selling a desired quantity of shares with reference to its ideal price.

Impact costs vary for different transaction sizes. It is dynamic in nature and depends on the number of outstanding orders (unexecuted/pending orders).

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