How to Spot Boiler Room Operators- Part 3
If you receive a telephone call from a broker who wants you to invest in one of the various instruments listed in Part 1, be mindful of the following list of descriptions which are typical hallmarks of a boiler room operator:
- High-pressure sales tactics. The caller will try to force you make a decision on the spot and repeatedly make calls trying to force you into making a poor and hasty investment decision.
- Promises of guaranteed or great profit at little or no risk. There are no investments that guarantee high returns and no or little risk. If it sounds to good to be true, it usually is. These callers will not tell you all the inherent risks in the investment nor try to determine whether it suits your investment objectives.
- Scant information given on the investment. Most legitimate firms will provide written materials clearly disclosing the potential for loss in an investment, as well as its short- and long-term tax implications. Illegitimate firms will by reluctant to give you anything in writing.
- References to "inside information". Callers will try to make you think that they have inside information that will, once disclosed to the public, cause the price of the stock to rise. Trading on insider information is prohibited at law. Usually promoters are not disclosing inside information, but simply false information to get you excited about the stock. Some promoters will claim that a large number of buyers will soon be coming into the market to purchase stock that will cause the stock price to escalate.
- Some brokers will try to set you up. In the initial telephone call, the broker will try to build your trust by describing their firm's past successes and the high quality of its research. They won't try to push any stock but might simply ask your permission to call again. In their subsequent call they will pique your interest by telling you about a great stock or investment that they will try to get you involved in. In the final call they will encourage you to buy the great investment immediately or lose out.
- Bait and Switch technique. Some brokers will at first discuss blue chip stocks and then start to encourage you into microcap or penny stocks.
If you have been a victim of the boiler operation, you will notice that once you have purchased a stock recommended by the caller, the previous heavy buying of the stock will have disappeared. In cases where the broker has enticed the investor into buying a house stock, once the broker or his firm have sold their stock position ("pump and dump") there are no other buyers who will buy your stock from you. The price will start to drift downwards.
You will also notice that once you have purchased the stock, the broker suddenly becomes unavailable to talk to you or encourages you not to sell. In some cases, the broker in fact does not execute your sale orders.
We have set out some suggestions on how to avoid being a victim of a boiler room scam in Part 4.
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