DECA+ Business Management and Administration Practice Exam

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What is the term for a practice where a broker encourages excessive trading to earn commission fees?

Churning
Skimming
Bundling
Picketing

The correct answer is: Churning

The term for the practice where a broker encourages excessive trading to earn commission fees is known as churning. This occurs when a broker engages in a pattern of buying and selling securities primarily to generate commissions for themselves rather than to benefit the client’s investment strategy. Churning is detrimental to clients as it can lead to increased transaction costs, potential tax liabilities, and can harm their overall investment performance. The broker’s actions are often motivated by self-interest, prioritizing personal gain over the client's best financial interests, which is why regulators closely monitor such practices to protect investors. The other terms do not relate to this specific scenario: skimming refers to taking unauthorized amounts from transactions, bundling involves grouping products or services together for sale, and picketing usually relates to protesting or demonstrating rather than a trading misconduct.