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Mutual Funds Videos 165 videos

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Finance: What Does it Mean to Churn an Account? 14 Views


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What Does it Mean to Churn an Account? While the occurrence now is much lower than in the past, brokers who were given limited trading discretion in the pre-smartphone era would often be compensated solely for commissions. Accounts where opportunities for day trading would often be used to generate incremental gains for the client while racking up fat in and out commissions for the brokers. The practice of executing multiple trades in a client account to generate commissions is known as “churning.”

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Transcript

00:00

Finance allah shmoop What does it mean to churn an

00:05

account All right Well back in colonial times before america

00:10

was the good old u s a You know what

00:12

That i po and seventeen seventy six colonists would churn

00:16

cream into butter back then churning involved moving a plunger

00:20

in a wood bucket over and over and over again

00:23

Really good for the traps and lattes there Not exciting

00:26

but well that's What happens when there's No better technology

00:29

today churning is something illegal that stock brokers dio and

00:34

remember normally brokers pay their own rent by getting paid

00:38

a commission off of each trade they do for customers

00:41

So churning in the financial sense here means that stockbrokers

00:45

are making tons of trades they really don't need to

00:48

be making in a client's account in order to generate

00:52

mohr commission for themselves they're churning the account to generate

00:56

dough for themselves Illegal very bad And sometimes it can

01:01

be difficult to detect or stop You know think about

01:04

little old ladies not really paying attention to our account

01:06

or ah cardiologists who really has no idea how wall

01:10

street works They have no idea of the brokers churning

01:12

Or not Well if you fall prey to a broker

01:14

who's involved in churning you'll end up overpaying them in

01:17

commissions And you might even have to pay extra taxes

01:20

because they realized gains from all those trades they didn't

01:23

need to make But if that brokered does get caught 00:01:26.979 --> [endTime] yeah he's toast

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