Investment Frauds – What are Boiler Rooms
and How These are Used to Rip Off Hard Earned Money of Investors?
The primary aim of every investor is to earn good returns on their investment. You can select right investments by consulting a licensed investment advisor and be sure that your financial profile has been properly analyzed and then only specific investments have been suggested. However, many times investors are lured by false promises and assurances, resulting is loss of their hard earned money. One such fraud scheme is known as boiler rooms, let us find how how such fraud scheme is operated so that you can prevent yourself from falling prey.
What are boiler rooms?
Boiler room refers to a form of sales tactics which tele-marketers use for selling very speculative investments (such as penny stocks). Boiler rooms usually call you as if they are third party brokerage firms but oftentimes these companies have some type of undisclosed financial interest or relationship with firms they are promoting. Many times, even the investment does not exist.
How these boiler rooms operate?
Firms operating these boiler rooms create office setup where salespeople operate telephones with very little or absolutely no experience in how investments work or what subject of finance is. But what they do have is good experience and expertise in achieving high pressure sales. There are some specific steps which boiler room operators take, let us look at them here.
Step #1: Build Trust
The first thing these phone based boiler room operators try to do is convince you about their importance as well as legitimacy. Some of the common tactics involve:
- Bragging about their firm as being among top players in the stock market.
- Using fancy titles such as senior account executive or investment advisor.
- Try to talk fast and make use of plenty of financial jargon.
The main idea here is to make you believe that you are taking with an experienced professional with special information as well as insights about the company which is being promoted. Goal of establishing such trust is to ensure that the investor does not ask any questions about the investment, company or the broker.
Step #2: Highlight Positive Factors about the Investment
After establishing trust, the next step consists of convincing investor that the investment scheme is the most suitable one for him. They have a carefully crafted script which highlights the game changing innovation, miraculous product or a revolutionary service the company provides. After that boiler room operator would generally jump into the topic of a great news that the company is going to release which will surely quickly move up the stock price. You will made to believe that you are among the very few who have this opportunity to make an investment before this fantastic news becomes public knowledge.
How you lose?
- Oftentimes, this whole thing is a big lie where there is no existence of such product, company, service or technology.
- In some other instances these boiler rooms own these worthless stocks in-house and plan such sales for driving up stock prices so as to sell the stocks for a profit. This will mean you as an investor will get stuck and have a totally worthless investment. This type of fraud scheme is also known as pump and dump.
Step #3: Close the Deal
This is the last step in which boiler room brokers close the sale. To achieve this goal they will attempt every tactic they know, make misrepresentation about the investment, relentlessly pressurize you and try manipulating the situation.
Red Flags to be Wary Of
You need to stay alert about some of the red flags which would indicate that the brokerage firm you are dealing with is one of the boiler rooms.
- Unsolicited and repeated emails or calls promoting a deal.
- Unfounded price predictions such as stock will surely double within a very short time.
- Assured extraordinary profits without the need to take any risk.
- False deadlines and urgency, as for example, chance to investment will not be there tomorrow or urgent action needed.
- Exclusivity of the deal like, only available for some lucky investors, or a private deal.
- Very unusual arrangement to collect your funds.
To summarize we will say that right knowledge can help you save yourself from the hands of such unscrupulous brokerage firms scamming you. By taking help of a licensed investment advisor you can minimize risk of such frauds and ensure that your investments will earn expected returns.