Definition
Impact Cost
Impact cost is the percentage cost of executing a specified order size relative to the ideal mid-price, and is the liquidity measure the NSE uses to assess stocks for index inclusion.
The NSE computes impact cost as the cost of buying or selling a defined value of a stock against the live order book, expressed as a percentage of the mid-price. A liquid Nifty 50 stock has a very low impact cost, while a thin stock shows a high one because the order must sweep several price levels.
Impact cost is a hard eligibility criterion for inclusion in indices like the Nifty 50, where the methodology requires the stock's impact cost to be below a threshold for a defined order size over the review period. It therefore directly links liquidity to index inclusion impact.
Related terms
- Market ImpactMarket impact is the adverse price movement caused by the act of trading itself, where a large buy pushes the price up and a large sell pushes it down as the order consumes available liquidity.
- SlippageSlippage is the difference between the expected price of a trade and the price at which it is actually executed, arising from market movement, spread and limited liquidity between order placement and fill.
- Free-float Market CapitalisationFree-float market capitalisation values a company using only the shares available for public trading, excluding locked-in holdings of promoters, governments and strategic investors.
- Index Inclusion ImpactIndex inclusion impact is the price and volume effect on a stock when it is added to or removed from a widely tracked index, driven by forced trading from passive and benchmarked funds.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.