Churning

Loading the player...

DEFINITION of 'Churning'

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.

BREAKING DOWN 'Churning'

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.

RELATED TERMS
  1. Commission Broker

    Someone who gets paid by the brokerage company for which he works ...
  2. Guilt-Edged Investment

    An unethical investment that generates profits for the investor. ...
  3. Wrap Account

    An account in which a brokerage manages an investor's portfolio ...
  4. Jitney

    A situation in which one broker who has direct access to a ...
  5. Front Running

    The unethical practice of a broker trading an equity based on ...
  6. Circular Trading

    A fraudulent trading scheme where sell orders are entered by ...
Related Articles
  1. Savings

    4 Signs Your Financial Advisor Is Ripping You Off

    Pay attention to the habits of your financial adviser to avoid him ripping you off by commingling, churning, scamming or embezzling your money.
  2. Personal Finance

    Investment Misselling A Global Problem

    When banks and advisors focus on fees and commissions, it is investors and the market that take the hit.
  3. Economics

    Online Investment Scams Tutorial

    To bamboozle someone out of their money is an age-old ruse. Learn about some of the gimmicks modern-day swindlers use and avoid becoming a statistic.
  4. Personal Finance

    The Cost And Consequences Of Bad Investment Advice

    Is your advisor working for you, or for him/herself? Find how to tell the difference.
  5. Budgeting

    Find The Right Financial Advisor

    Learn how to weed out those who are just out to make a quick buck.
  6. Professionals

    Ethical Issues For Financial Advisors

    Learn what to do when that devil on your shoulder begins to whisper.
  7. Investing Basics

    Paying Your Investment Advisor - Fees Or Commissions?

    The way a professional is compensated can affect quality of service. Learn more here.
  8. Retirement

    The Hidden Costs Of Investing In Mutual Funds

    Find the hidden fees in your portfolio, so that you can increase your rate of return.
  9. Brokers

    3 Dishonest Broker Tactics

    Learn how to spot three dishonest techniques that your broker might be using on you.
  10. Personal Finance

    4 Dishonest Broker Tactics And How To Avoid Them

    Protecting yourself from unscrupulous practices means knowing how to spot them.
RELATED FAQS
  1. What is a wrap account and what are the advantages of using one?

    Wrap accounts, in which brokerage account costs are "wrapped" into a single or fixed fee, are great if you don't have time ... Read Full Answer >>
  2. What are some high-profile examples of wash trading schemes?

    In 2012, the Royal Bank of Canada (RBC) was accused of a complex wash trading scheme to profit from a Canadian tax provision, ... Read Full Answer >>
  3. What are examples of inherent risk?

    Inherent risk is the risk imposed by complex transactions that require significant estimation in assessing the impact on ... Read Full Answer >>
  4. What is the difference between wash trading and insider trading?

    Wash trading is an illegal trading activity that artificially pumps up trading volume in a stock without the stock ever changing ... Read Full Answer >>
  5. What impact did the Sarbanes-Oxley Act have on corporate governance in the United ...

    After a prolonged period of corporate scandals involving large public companies from 2000 to 2002, the Sarbanes-Oxley Act ... Read Full Answer >>
  6. Who are the most famous people convicted of insider trading?

    In finance, insider trading refers to the buying and selling of security by a person who has access to material non-public ... Read Full Answer >>
Hot Definitions
  1. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  2. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  3. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  4. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  5. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
Trading Center