Net proceeds refer to the amount of money made from a sale after all transaction expenses were deducted. The concept exists in investing, real estate, and any other situation in which an item is sold and in which there are transaction costs associated with the sale. It is important to calculate net proceeds to determine the true rate of return and profits generated by a given action.
In the field of investing, the net proceeds from a transaction are determined by subtracting investing fees and costs. For example, if an individual bought 100 shares of stock for $100 US Dollars (USD) and then sold the stock for $110 USD, it would appear that he made $10 USD. The actual amount he made, however, would have to be reduced by the commission and transaction fees he paid. If he was charged $5 USD to buy the stock and $5 USD to sell the stock, his actual net profit or proceeds from the sale would be $0 USD.
The same calculation can be done in the field of real estate. An individual who sells his home generally must pay a commission and fees to the real estate agent who assists with the sale. He also may have to pay closing costs and bank fees associated with the sale. The amount the property owner thus makes off of the sale of a given piece of property must be calculated after subtracting these costs. Since the commission and fees associated with the sale of a home or piece of private real estate normally add up to six percent in the United States — three percent to the buyer's agent and three percent to the seller's agent — the net proceeds can actually be significantly reduced by the transaction costs and fees.
Generally, it stands to reason then, that the lower the transaction costs associated with the sale, the easier it is to have a higher net profit or net proceeds. In other words, an individual might be better off to find a real estate agent who was willing to work on a lower flat fee pay rate in order to reduce his transaction costs and have more proceeds from the sale. Likewise, an investor may wish to consider switching to a discount brokerage house and executing his trades himself online, as opposed to using a full service broker who may charge higher commissions and fees, raising the transaction costs and reducing the profit actually realized. The benefit of incurring higher transaction costs must always be weighed against the detriments of using a lower cost service in order to determine what is the best course of action.
