Finance is a complicated business. It is possible to lose money on an investment before you even make it. What are the factors that affect the costs of making investments?
A greater number of variables that leads to potential complications increasing the cost of a financial transaction
Less mature markets or industries (also called emerging or frontier markets) are, in general, less organized and therefore more costly to participate in but they allow room for growth and innovation and so are attractive to investors
Significant complexity or rate of change in of the regulatory environment requires more time and expertise to navigate therefore increasing the costs of investments
Average total cost of a service or product decrease when number of different services provided within a single institution increases. As a result, financial institutions often diversify what financial services or products they offer
The greater number of similar transactions (also called specialization), the lower per unit fixed costs as costs are spread over a larger number of transactions. Scale also creates operational efficiencies and synergies
Whether or not knowledge necessary to inform investment decision is readily available; for example, in an early stage, field knowledge is less readily organized or accessible
If investors cannot easily identify enterprises ready for investment in a particular industry or geography (also called absorptive capacity), investors need to build technical support or market formation activities into the cost of financing
Investors rarely invest alone. Therefore, whether other appropriate investment capital is available to co-invest or partner affects the cost of the transaction to the investor
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