Churning is the name for the practice by unscrupulous stockbrokers who make excessive trades of stocks on behalf of their clients not to maximize the profit of their clients, but to maximize their own fees for making the trades since the stockbroker gets paid every time he or she makes a trade.
It rarely makes sense to give your stockbroker the authority to trade whenever he or she wants. Make sure that you make the final decision on any recommended trade. And read your monthly statement. Many people fail to do so because the monthly statements appear to be too confusing.
Everyone would like to be able to invest in a stock while the price is still low, but can be expected to rise dramatically. This desire for the quick hit is used by scam artists in a scam called the “pump and dump.” In this scam, you may receive an email or a fax, often apparently intended for someone else informing you of a company with a low cost stock that is about to have its price rise tremendously. Other times the stock may be talked up in Internet chat rooms. Most often these companies are small capitalization companies, often referred to as penny stock companies. These stocks are often thinly traded. Following the advice, from someone they don’t know, the victim buys the stock and, sure enough, the stock value promptly rises, but then without warning, the stock plummets in value and you are left with a poor investment. This scam is created by criminals who buy the stock themselves at a low value and then influence others to buy the stock regardless of the fact that the stock would not be expected to rise in value were it not for the fact that the scammers misrepresent the stock to their victims and lure them into buying it. Once the stock has shot up in value, the criminals, knowing that the emperor has no clothes, sell their stock, make a profit and leave the victims with worthless stock certificates.
Always consider the sources of any investment advice that you receive. How reliable is the source? What are their credentials? What do they stand to gain? Is it inside information that they are offering in violation of securities trading laws? Remember Martha Stewart who went to jail for lying about involvement in insider trading.