Question Details

	Username: Maria Rating: Asked to: Anton Luyten Date Created: 21 May 2019
Category	28
Tag	Financial
Question	What is Overtrading?

Advice from Guru

Hello Maria,

Overtrading refers to excessive buying and selling of stocks by either a broker or an individual trader. Both are entirely different situations and have very different implications. An individual trader, whether working for themselves or employed on a trading desk by a financial firm, will have rules about how much risk they can take, including how many trades are appropriate for them to make. Once they have reached this limit, to continue trading is to do so unsoundly. While such behavior may be bad for the trader or bad for the firm, it is not regulated in any way by outside entities.

However, a broker overtrades when they excessively buy and sell stocks on the investor’s behalf merely with the outcome of increased commissions. Overtrading, also known as churning, is a prohibited practice under securities law. Investors can observe that their broker has been overtrading when the frequency of their trades becomes counterproductive to their investment objectives, driving commission costs consistently higher without observable results over time.

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