DEFINITION of 'Overtrading'

1. Excessive buying and selling of stocks by a broker on an investor's behalf in order to increase the commission the broker collects.

This situation has been known to arise when brokers are pressured to place a newly issued security underwritten by a firm's investment banking arm.

Also known as "churning".

2. A situation in which a company is growing its sales faster than it can finance them. This usually leads to enormous accounts payable or accounts receivable and a lack of working capital to finance operations.

BREAKING DOWN 'Overtrading'

1. One way to protect yourself from overtrading (churning) is through a wrap account - a type of account that is manged for a flat rate rather than charging commission on every transaction.

2. Many businesses become insolvent because they try to accommodate everyone who wishes to purchase their products. This ultimately leads to not being able to pay for the financing costs used to produce the goods.

  1. Investment Bank - IB

    A financial intermediary that performs a variety of services. ...
  2. Wrap Account

    An account in which a brokerage manages an investor's portfolio ...
  3. Solvency

    The ability of a company to meet its long-term financial obligations. ...
  4. Commission

    A service charge assessed by a broker or investment advisor in ...
  5. Churning

    Excessive trading by a broker in a client's account largely to ...
  6. Market

    A medium allowing buyers and sellers of a specific good or service ...
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