Churning

A A A

DEFINITION

Excessive trading by a broker in a client's account largely to generate commissions. Churning is an illegal and unethical practice that violates SEC rules and securities laws. While there is no quantitative measure for churning, frequent buying and selling of securities that does little to meet the client's investment objectives may be construed as evidence of churning. Churning may often result in substantial losses in the client's account, and even if profitable, may generate a tax liability for the client.

INVESTOPEDIA EXPLAINS

Since churning can only occur if the broker has discretionary authority over the client's account, the obvious way to avoid this risk is for the client to always maintain full control over the account. Another alternative is to use a fee-based account rather than a commission account, since this ensures the broker's objectives are aligned with those of the client.


VIDEO

RELATED TERMS
  1. Commission Broker

    Someone who gets paid by the brokerage company for which he works for each order ...
  2. Circular Trading

    A fraudulent trading scheme where sell orders are entered by a broker who knows ...
  3. Wrap Account

    An account in which a brokerage manages an investor's portfolio for a flat quarterly ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from ...
  5. Jitney

    A situation in which one broker who has direct access to a stock exchange performs ...
  6. Guilt-Edged Investment

    An unethical investment that generates profits for the investor. A guilt-edged ...
  7. Bucketing

    A situation where, in an attempt to make a short-term profit, a broker confirms ...
  8. Bucket Shop

    1. A fraudulent brokerage firm that uses aggressive telephone sales tactics ...
  9. Portfolio Pumping

    The illegal act of bidding up the value of a fund's holdings right before the ...
  10. Financial Industry Regulatory Authority ...

    A regulatory body created after the merger of the National Association of Securities ...
Related Articles
  1. Find The Right Financial Advisor
    Budgeting

    Find The Right Financial Advisor

  2. Ethical Issues For Financial Advisors
    Professionals

    Ethical Issues For Financial Advisors

  3. Paying Your Investment Advisor - Fees ...
    Investing Basics

    Paying Your Investment Advisor - Fees ...

  4. The Hidden Costs Of Investing In Mutual ...
    Retirement

    The Hidden Costs Of Investing In Mutual ...

  5. 3 Dishonest Broker Tactics
    Brokers

    3 Dishonest Broker Tactics

  6. 4 Dishonest Broker Tactics And How To ...
    Personal Finance

    4 Dishonest Broker Tactics And How To ...

  7. Is Your Broker Acting In Your Best Interest?
    Brokers

    Is Your Broker Acting In Your Best Interest?

  8. Investment Misselling A Global Problem
    Personal Finance

    Investment Misselling A Global Problem

  9. The Cost And Consequences Of Bad Investment ...
    Personal Finance

    The Cost And Consequences Of Bad Investment ...

  10. What is a wrap account and what are ...
    Retirement

    What is a wrap account and what are ...

comments powered by Disqus
Hot Definitions
  1. XW

    A symbol used to signify that a security is trading ex-warrant. XW is one of many alphabetic qualifiers that act as a shorthand to tell investors key information about a specific security in a stock quote. These qualifiers should not be confused with ticker symbols, some of which, like qualifiers, are just one or two letters.
  2. Quanto Swap

    A swap with varying combinations of interest rate, currency and equity swap features, where payments are based on the movement of two different countries' interest rates. This is also referred to as a differential or "diff" swap.
  3. Genuine Progress Indicator - GPI

    A metric used to measure the economic growth of a country. It is often considered as a replacement to the more well known gross domestic product (GDP) economic indicator. The GPI indicator takes everything the GDP uses into account, but also adds other figures that represent the cost of the negative effects related to economic activity (such as the cost of crime, cost of ozone depletion and cost of resource depletion, among others).
  4. Accelerated Share Repurchase - ASR

    A specific method by which corporations can repurchase outstanding shares of their stock. The accelerated share repurchase (ASR) is usually accomplished by the corporation purchasing shares of its stock from an investment bank. The investment bank borrows the shares from clients or share lenders and sells them to the company.
  5. Microeconomic Pricing Model

    A model of the way prices are set within a market for a given good. According to this model, prices are set based on the balance of supply and demand in the market. In general, profit incentives are said to resemble an "invisible hand" that guides competing participants to an equilibrium price. The demand curve in this model is determined by consumers attempting to maximize their utility, given their budget.
  6. Centralized Market

    A financial market structure that consists of having all orders routed to one central exchange with no other competing market. The quoted prices of the various securities listed on the exchange represent the only price that is available to investors seeking to buy or sell the specific asset.
Trading Center