Why Stock Brokers turn to Churn and Burn

Why Stock Brokers turn to Churn and Burn

You may not have heard of the term ‘Churn and Burn’ but this ignorance could cost you thousands of dollars in fees with your stock broker.  The idea of Churn and Burn is where a stock broker purposely performs excessive trading or buying and selling stock to generate service fees from unsuspecting clients.  At its core this is a method fraud and according to the security and exchange commission this is completely illegal.  As an investor, should you feel the victim of churning and burning then find the contact information of a good stockbroker fraud lawyer, but knowing that it is illegal why does a stock broker risk their career to churn and burn investment accounts?

  • All about the moneyWhen it comes to assessing fees for services this is a natural product of using the services of a stock broker, however some stock brokers that this may become a loop hole in the law. The idea of excessive trading is difficult to track and often will need to be proven in a court of law, so most stock brokers do not believe that they will be caught.  As an example, say a stock broker has a client base of 20 people and he asks all 20 people to preform different trading transactions, each of those transactions gives him $30 in commissions, which would equal $600 in profit.Not only does hurt the investor by hiking up their commissions bill but it also cheats the investor out of dividends and raises their tax bill.  With all of these added costs it could complete negate the purpose of investing in the stock market.
  • It is about the chaseStock brokers are human too and when it comes to working with and in the stock market it often ends up becoming a high-risk game with the goal beating the market, as well as being part of the next big thing. Not only does a stock broker expect that of themselves but has become something that their clients also expect from them.  Those who know and understand this concept have seen investors flock to a person who has become a star mutual fund manager, hedge fund manager, or stock broker because they have a history of beating the market.
  • Covering up lossA stock broker may choose to churn and burn accounts is an effective way to cover up loss in the stock market. As stated before there is an expectation from clients that accounts typically beat the market, moving money from failing stocks to winning stocks is a way to cover the tracks of a losing portfolio and attempt to play catch up after a big loss.  As an investor your statement might show at what price the stock was bought and sold for, but you may have to do the math on the actual percentage of profit-and-loss.

Whether a stock broker completed excessive trading with purpose and intent is completely up to the court systems, however it is always in an investors best interest to monitor investment accounts and complete the homework so you know if your money is working hard for you.

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