Opening a demat account is simple, but where and how to invest is what beginner traders & investors find challenging. To get assistance they generally rely on brokers or advisors to guide their portfolios.
Some even provide their account to handle to brokers, considering it be safe.
While many of them work ethically, there are cases where brokers do excessive trading is done in a client’s account just to generate more commission or brokerage. This unethical practice is known as churning.
Let’s get into detail of what does churning in stock market means.
Churning Meaning in Stock Market
Churning refers to excessive buying and selling of securities in a client’s account by a broker with the sole intent of generating more commissions, without any real benefit to the client.
It is considered a serious violation of both SEBI and exchange regulations.
The key feature of churning is that trades are made not for investment gain, but to earn more brokerage or advisory fees.
- Unnecessary Costs: Each transaction incurs a brokerage fee, taxes, and other charges. Frequent trading adds up to a large cost.
- Poor Portfolio Performance: Since the focus is not on portfolio growth but on commissions, the investor may suffer losses or minimal returns.
- Loss of Trust: Churning erodes the relationship between the investor and the broker/advisor.
- Legal Violations: It’s a breach of fiduciary duty and can lead to penalties for the broker.
Churning in Stock Market Example
Suppose your advisor buys and sells the same stock multiple times in a month, without any real news or market movement to justify those trades.
The motive isn’t to make a profit but to generate more brokerage on each trade. Over time, the cost of these trades eats into your capital.
Here is the real life case study of one such brokerage churning case in stock market:
In one notable case, a client approached us after suffering heavy losses in her Upstox account.
She had trusted her broker to provide guidance, but without her knowledge or consent, multiple trades were executed in her account, many of which were reversed within minutes or hours, indicating clear signs of churning.
The objective was not portfolio growth but to generate brokerage through high-volume trades. The client wasn’t even informed about these transactions in real time.
Upon investigation and filing a complaint through SEBI SCORES, it was found that no trade confirmations were sent as per regulatory norms, and client instructions were never recorded. After consistent follow-ups and documentation, the client received a partial refund of ₹56,000.
This case highlights how churning not only leads to financial loss but also violates regulatory principles—and reinforces why clients must monitor their accounts regularly.
How to Identify if Your Account is Being Churned
Here are a few warning signs that may indicate churning:
- High trading volume without clear reasoning
- Trades being executed without your consent or explanation
- Frequent switching between similar types of stocks
- Significant commission or brokerage charges in your statement
- No noticeable improvement in portfolio returns despite active trading
Is Churning in Stock Market Illegal?
Yes, churning is illegal under SEBI Regulations. It is considered a form of fraud and misrepresentation.
If proven, SEBI can take the following actions against the broker or advisor:
- Impose monetary penalties
- Suspend or cancel their registration/license
- Order compensation to be paid to the affected client
- Initiate legal proceedings for recovery or fraud
How to Report Brokerage Churning Scam in Stock Market?
So, if your broker is misusing your account by doing unauthorized trades just for its benefits, then you can file complaint in SEBI.
To file a complaint, follow the steps below:
- Collect Evidence: Keep a record of trades, charges, and your communication with the broker.
- Raise a Complaint: First, approach the broker or advisory firm with your concern.
- Escalate to SEBI SCORES: If the issue remains unresolved, file a complaint at SCORES
- Go for arbitration: If financial loss is involved, you may also file arbitration in stock market through NSE or BSE.
Need help? Register with us and get assistance in filing a case and also to represent it in arbitration, if required.
Conclusion
Churning is a silent destroyer of investor wealth. Whether you manage your portfolio or rely on an advisor, always review your account activity regularly. If you spot unusual trading patterns or excessive charges, don’t ignore them. A vigilant investor is a protected investor.
