What it is:
How it works (Example):
Let's assume investor X wants to sell his house for $700,000. He purchased the house six months ago for $650,000. Normally, it would seem that the investor has made $50,000. But the net payoff is much lower once the investor factors in the following costs associated with the sale:
The net payoff is now: $700,000 - $650,000 - $42,000 - $8,000 - $7,500 - $1,000 = -$8,500
In other words, the net payoff is actually negative. Investor X will have to sell the house for far more than $700,000 in order to make money, even though $700,000 is well above the original purchase price.
Why it Matters:
As the example shows, calculating the net payoff of any investment decision can often lead to a far different decision than one based on the gross payoff. Forgetting to incorporate commissions into a profit calculation is one common oversight, especially for those trading stocks and other securities, which underscores the need to calculate net payoff in most investment decisions.