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Churning

Churning is an illegal trading activity that may cause an account holder to seek damages in a court of law. An unscrupulous broker who is guilty of churning executes trades in a client's account for the sole purpose of generating commissions and thus increasing his own income.

As a measure of churning activity, the court will look at the number of times the investment capital of the account has been "turned over" or re-invested during the past 6 to 24 months. If the entire assets of an account have been involved in buying and selling once ever six months to two years, the broker has churned the account. This kind of activity can destroy the investment value of a portfolio in short order due to the number of commissions generated.

Critics point to the practice of paying brokers on commission as nothing but encouragement for this kind of activity which does not occur in other investment venues where commissions are not paid.

More Glossary Terms Explained here


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