The practice by brokers of encouraging excessive trading for increased commissions is known as?

The practice by brokers of encouraging excessive trading for increased commissions is known as?

• A. Market manipulation
• B. Penny stock trading
• C. Churning
• D. Overtrading

Answer: (C)

The practice of encouraging excessive trading by brokers for the purpose of increasing their commissions is known as churning. This unethical practice occurs when a broker transacts in a client's account for the sole purpose of generating commissions, rather than in the client's best interest. Churning can lead to increased costs for the investor and may not align with their investment goals or risk tolerance. Churning undermines the fiduciary duty that brokers have to act in the best interests of their clients. Regulatory bodies, such as the SEC, monitor for this type of activity, and brokers found engaging in churning can face significant legal repercussions and penalties. Understanding churning is crucial for investors, as it highlights the importance of monitoring trading activity in their accounts and ensuring that the transactions being made are justified by their investment strategy rather than driven by the broker's desire to earn commissions.

The practice of encouraging excessive trading by brokers for the purpose of increasing their commissions is known as churning. This unethical practice occurs when a broker transacts in a client's account for the sole purpose of generating commissions, rather than in the client's best interest. Churning can lead to increased costs for the investor and may not align with their investment goals or risk tolerance.

Churning undermines the fiduciary duty that brokers have to act in the best interests of their clients. Regulatory bodies, such as the SEC, monitor for this type of activity, and brokers found engaging in churning can face significant legal repercussions and penalties.

Understanding churning is crucial for investors, as it highlights the importance of monitoring trading activity in their accounts and ensuring that the transactions being made are justified by their investment strategy rather than driven by the broker's desire to earn commissions.