According to the Securities and Exchange Commission (SEC), churning an account refers to excessive trading by the stock broker in order to generate commissions. The number of trades considered excessive varies for different types of investors. In order for churning to occur, there must be excessive trading in the account that goes against the investor's goals.

Churning can be identified by calculating the “turnover ratio.” The turnover ratio 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 6 or higher would indicate churning in a typical customer account, but would be meaningless in a day trader's account.

The broker can also more easily churn an account if he has been given control over the investment decisions without having to consult with the investor. This is usually decided by the investor when asked how involved he wishes to be. An investor should always make sure the broker knows his investment objectives and risk tolerance. Investment goals should be revisited regularly to make sure the broker is aware of these goals. Most brokerages will send out forms periodically to state their investment strategy in writing.

The last element of churning an account is having intent to defraud the investor. This intent is usually hard to prove but is usually proven by determining whether or not excessive trading occurred and by determining if the broker controlled the account.

If an investor thinks that he has been the victim of churning, he should contact his brokerage and ask questions or contact the SEC to file a complaint.  The Wall Street Journal offers some pointers here, as well.