The idea of churn and burn has advanced with the speed of business. Whether the person is referring to a high turnover rate in employees or it is churning customers only to burn them away from the business. In this case, we are referring to a type of fraud that is commented by stock market brokers and other professionals. If you are working with an investment professional, your ideal would be for the professional to act in your best interest to achieve your long-term investment goals. Your goals may be retirement, a spectacular vacation for all members of your family, or upcoming college expenses, whatever it is, you would like to make the most of every dollar.
How the word churn is defined in the investment world is to excessively trade on an individual’s account in order to ramp up commissions, since commissions can only become generated with an action a trade normallyoccurs. Not only can churning result in substantial loses for the investor but it can also create a tax liability. According to the Security and Exchange Commission this practice is not only unethical, it is illegal, but there is no way to measure excessive trading. Should you believe that the trading in your portfolio is excessive then find a good securities attorney such as Thomas Law Group; your financial statement will have to be reviewed by the court.
One way to avoid churn and burn with your stock broker is to not give him/her rights to execute actions on your behalf. Keep full control over the account and your money. Another way to avoid churn and burn is to avoid the stock broker entirely and manage your account within a discount brokerage.
Unfortunately, you may need to be saved from yourself, because individual investors can also churn and burn on their own accounts. Churning and burning on your own account means that you believe that you can get in on the ground floor on the next big investment, however the next big investment idea comes frequently.
When you churn and burn or become a victim of churn and burn, stocks are sold with the hope of a short-term gain. However, the small gain that you may receive with a churn and burn is short-sighted, not only to do you pay more if a stock is sold at a profit in the way of capital gains tax but you miss out on valuable dividends from the companies that you are investing. If you are working with a stock broker you are often working with products and services that allow the brokerage to keep the dividend over the long-term, so you are not only paying commission but you are also walking away with money on the table.
Whether you are working with an investment professional or you are choosing to work independently it is in your best interest to know the reasons why you are investing in a stock for the long-term and to have in place an exit strategy to either cut loses or to ring the register and pocket some profits.