Turnover Rate

Sometimes securities regulators talk about the turnover rate when describing how often trades are happening in an account.

There's a possible problem if the turnover rate for an account is very high or at least higher than the actual average daily value of the account.

Example

If Billy Bob's account has an average balance of $10,000 but has total combined trades of $70,000 for the year, then his account is trading at a high turnover rate. It's a problem for a few reasons. Billy Bob might be the victim of churning, where the broker or manager just trades with no rhyme or reason to earn more commissions (each time a trade is made, an commission is earned). Also, each time a sale is made, BB may have to pay taxes on the gains. Her might be paying extra taxes with a high turnover—and all those transactions might not even be doing his account any good.