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Warning
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Simple English definitions for legal terms
churning
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A quick definition of churning:
Churning: Churning is when a stock broker does bad things by making too many trades for a customer just to make more money for themselves. This is against the law because it's not fair to the customer. The government has rules to stop this from happening.
A more thorough explanation:
Churning is a dishonest practice that some stock brokers use to make money for themselves. It happens when a broker trades too much in a customer's account, even though it's not necessary or helpful for the customer. The broker does this to make more money in commissions, even if it's not good for the customer.
For example, let's say a customer tells their broker that they want to invest in safe, long-term stocks. The broker might then buy and sell many different stocks in the customer's account, even though it's not what the customer wanted. The broker does this to make more money in commissions, even though it's not good for the customer's investment goals.
This is illegal because it's considered fraud. The Securities Exchange Act of 1934 makes it against the law to use dishonest practices when buying or selling stocks.