Your broker earns a commission or collects a fee every time they trade a stock. This can tempt some unethical brokers to engage in “churning.” Churning happens when a broker makes several small trades to help them earn extra income from commissions and fees. Churning is solely for the benefit of the broker. It does nothing to help your investments. It can even lead to you losing your hard-earned money.
That said, it’s the job of your broker to make trades. Depending on the type of investments you have, making a high-volume of trades may even be advantageous. However, you should still take note of signs of churning. Recognizing the warning signs can let you know whether you’re being taken advantage of or whether your broker is operating above board.
Times when you should be skeptical
Take particular note if:
- You’ve noticed your broker making more trades than is normal
- Your broker telling you to buy a large number of securities suddenly
- Your broker refusing to explain the strategy behind their trades
To prevail on a churning claim, you must prove that your broker had control of your investments. You must also show that the number of trades was excessive. Keep in mind that what be excessive in one context may be the standard way of doing business in another.
If you believe your broker is engaging in churning, you have no obligation to continue using the broker’s services. If churning has caused you to lose money, you may have legal options. You should discuss your situation with a skilled legal professional.