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In investing, what is churning?

On Behalf of | Apr 22, 2019 | Representing Investors |

If you pay your broker a commission on every trade, you’re paying them for their knowledge and experience. You trust that they are making moves that will benefit you and your account.

Churning happens when the broker engages in excessive trading for the sole purpose of creating more commissions for themselves. They know that they get paid when they make trades, so they make trades that are unnecessary, that don’t help you or that actually hinder you. They’re just worried about what they can earn off of you and they hope you don’t notice.

Now, if the broker makes reasonable trades and can justify why they thought that the trade would help you, even if they get some of those trades wrong, you don’t mind paying the commission. That’s why you’re working with them. If they’re making pointless lateral moves or even poor decisions, then you start feeling like they’re just trying to pull money out of your pocket, one commission at a time.

Not only is this unethical, clearly going against your best interests, but it is illegal. It violates securities laws. It breaks rules laid down by the SEC (Securities and Exchange Commission).

Naturally, though, these cases can get complex. You may feel like the broker is making too many trades, but the broker may honestly feel like they had your best interests in mind. Churning is done intentionally to absorb commissions. Is it possible that you just got a broker who isn’t all that good at managing the account? Or were they actually malicious? There are a lot of questions to ask, and you need to understand the legal process.

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