Impact cost refers to the additional cost incurred when buying or selling a large volume of securities, where the actual transaction price deviates from the expected price due to the sheer size of the trade.
It's a problem institutional investors find hard to avoid when conducting large transactions. Impact cost is considered a fatal flaw that institutions can hardly shake off. For instance, when an institution is bullish on a group of stocks, it takes a long time to build its desired position. If it rushes to build the position, the large buying volume in a short period will drive up the stock price, inevitably making the cost of building the position much higher than expected. Similarly, if it rushes to sell the stocks, it's essentially suppressing the stock price itself, and the final selling price will be lower than the original expected price. For individual investors, the impact cost is almost zero due to their small trading volume.
