What is Considered Excessive Trading? A Guide to Understanding and Avoiding This Costly Practice

Excessive trading, also known as churning, is a serious issue in the financial industry. It occurs when a stockbroker engages in trading in excess of the investor’s goals in order to generate commissions This can result in significant losses for investors, as they are charged unnecessary fees and commissions

In this comprehensive guide, we will delve into the world of excessive trading, exploring its definition, identifying its red flags, and providing valuable tips to help you protect yourself from this harmful practice.

Understanding Excessive Trading

Excessive trading can take many forms, but it generally involves the following characteristics:

• High volume of trades: Excessive trading often involves a significantly higher number of trades than what is necessary to achieve the investor’s goals.
• Short holding periods: Stocks are bought and sold within a short period, often within days or weeks.
• Frequent in-and-out trading: Securities are bought and sold, only to be repurchased shortly after.
• Trading that is not aligned with the investor’s risk tolerance or investment objectives: The trading activity does not match the investor’s stated goals and risk appetite.

Red Flags of Excessive Trading

It can be difficult to identify excessive trading but there are several red flags that investors should be aware of:

• Frequent account activity: You notice a significant increase in the number of trades in your account, even though your investment goals or risk tolerance haven’t changed.
• High commissions and fees: You are paying significantly higher commissions and fees than usual.
• Unfamiliar investments: You are being recommended investments that you don’t understand or that are not aligned with your investment goals.
• Difficulty reaching your broker: You have trouble getting in touch with your broker to discuss your concerns.

Protecting Yourself from Excessive Trading

If you suspect that you may be a victim of excessive trading, there are several steps you can take to protect yourself:

• Talk to your broker: Discuss your concerns with your broker and ask for an explanation for the high trading activity.
• Review your account statements: Carefully review your account statements to identify any unusual trading patterns.
• Contact FINRA: If you are unable to resolve the issue with your broker, you can file a complaint with FINRA, the Financial Industry Regulatory Authority.
• Consider changing brokers: If you are not comfortable with your current broker, you may want to consider switching to a different firm.

Fidelity’s Excessive Trading Policy

Fidelity Investments, a leading financial services company, has implemented a comprehensive excessive trading policy to protect its investors. This policy includes the following key features:

• Monitoring roundtrip transactions: Fidelity monitors the number of roundtrip transactions, which involve buying and selling the same security within a short period.
• Fund level blocks: If an investor engages in excessive roundtrip trading, their account may be blocked from making further purchases in that fund.
• Complex-wide blocks: Investors who engage in excessive trading across multiple Fidelity funds may be blocked from making purchases in any Fidelity fund.

Excessive trading is a serious issue that can have a significant impact on investors’ financial well-being. By understanding the red flags and taking proactive steps to protect yourself, you can avoid falling victim to this harmful practice. Remember, it is crucial to work with a reputable broker who prioritizes your financial goals and interests.

Frequently Asked Questions

What is considered excessive trading?

Excessive trading occurs when a stockbroker engages in trading in excess of the investor’s goals in order to generate commissions. This can involve a high volume of trades, short holding periods, frequent in-and-out trading, and trading that is not aligned with the investor’s risk tolerance or investment objectives.

What are the red flags of excessive trading?

Red flags of excessive trading include frequent account activity, high commissions and fees, unfamiliar investments, and difficulty reaching your broker.

How can I protect myself from excessive trading?

You can protect yourself from excessive trading by talking to your broker, reviewing your account statements, contacting FINRA, and considering changing brokers.

What is Fidelity’s excessive trading policy?

Fidelity’s excessive trading policy includes monitoring roundtrip transactions, implementing fund level blocks, and imposing complex-wide blocks for repeat offenders.

What are some additional resources for learning about excessive trading?

• FINRA’s Investor Education Foundation: https://www.finrafoundation.org/
• The Securities and Exchange Commission (SEC): https://www.sec.gov/
• The North American Securities Administrators Association (NASAA): https://www.nasaa.org/

Additional Tips

• Be clear about your investment goals and risk tolerance with your broker.
• Ask questions and don’t be afraid to challenge your broker’s recommendations.
• Get everything in writing, including your investment objectives and risk tolerance.
• Monitor your account statements regularly and report any suspicious activity to your broker or FINRA.

By following these tips and staying informed about excessive trading, you can make informed investment decisions and protect your financial future.