A stockbroker or financial advisor earns money every time his client purchases or sells securities. This is inherently not a problem, because this money serves as commissions. But it can be a problem when the stockbroker or financial advisor is intentionally being too active in the trade market just to earn more money from his client. This is called excessive trading.
According to the website of Erez Law, those who have been victims of excessive trading may have legal options, such as making the stockbroker or financial advisor accountable for the damages. But when you think about it, avoiding excessive trading itself is much better than going legal about it.
To avoid significant damages from excessive trading, you should look for the following signs:
- Too many transaction confirmations – Every trade in your account is accompanied by a transaction confirmation. It can be said that receiving too many transaction confirmations is a sign that your broker is excessively trading, especially when you are not really an active trader yourself.
- The value in your account is declining for no clear reason – A decline in account value is normal, especially if you know you have suffered losses from losing investments or the market has been plummeting. If there is no clear reason why the value in your account is declining, your broker might be trading excessively and basically robbing you through commissions.
Even though many excessive trading cases arise from the malicious intentions of third parties such as stockbrokers and financial advisors, excessive trading is not exclusively practiced by them. The investor himself might be the one who is being overly active in the trade market, resulting into significant losses in the form of commissions to his stockbroker or financial advisor or losses from the investment itself. Below are some of the most common excessive trading practices used by investors:
- Bandwagon trading – Copying the trades of those who appear to know what they are doing.
- Shotgun trading – Buying anything and everything that shows promise.
- Discretionary overtrading – Purchasing and selling too many securities based on non-quantifiable data, such as personal preferences and news reports.
- Technical overtrading – Purchasing and selling too many securities based on their own set of technical indicators that don’t necessarily work.