According to the Securities and Exchange Commission (SEC), churning of an account occurs when the stockbroker generates commission by trading excessively. When churning an account, the stockbroker does not consider the investment strategy or risk tolerance to the investor.

In order for churning to take place, the investor must have given the stockbroker the authority to manage the account with little or no input from the investor. Therefore, if an investor decides what stocks are bought and sold, it is difficult for churning to take place.

If an investor has given control to the stockbroker, excessive trading can be determined by calculating the “turnover ratio” in the account. In order for churning to occur, there must be excessive trading in the account that goes against the investor's goals. An example would be to compare the number of trades made by a day trader to a retiree's account. You would expect the day trader to have many more trades.

Calculate the “turnover ratio,” which is the total amount of purchases made in the account divided by the average monthly equity in the account. That ratio is then annualized by first getting a monthly ratio based on the number of months involved, then by multiplying by 12. A ratio of six or higher would indicated churning in a typical customer account, but would be meaningless in the day trader's account.

An investor should periodically ensure that the stockbroker is aware of his investment goals and should review account statements for brokerage fees. If an investor thinks that he or she has been the victim of churning, they should contact their brokerage and ask questions, or contact the SEC at http://www.sec.gov/complaint.shtml to file an online complaint.