What is a boiler room operation?

By Investopedia Staff AAA
A:

In the context of investing, the term "boiler room operation" refers to the use of high pressure sales tactics to sell stocks to clients who are "cold called", or called randomly, most likely after being picked out of a phone directory.

Boiler rooms are often set up in inexpensive office spaces, where armies of telemarketers make these cold calls. While the stock they sell may be real (most likely an unknown micro-cap stock), the information these salespeople use to hype their product could be false or misleading because of their overwhelming desire to sell the stock and claim commissions. They'll often tout stocks that trade on the Pink Sheets or the over-the-counter bulletin board, as both of those exchanges require little in terms of disclosure and regulation.

Besides the fact that these operations are based on deception and coercion, many of these salespeople and brokers are not even qualified to work in the securities industry. And they will go to great lengths to try to swindle you. Some of these "brokers" will claim to have offices in different countries to give the impression of importance and wealth, but in reality they have set up virtual offices with a mailing address and a call forwarding system.

If you become a victim of a boiler room operation, it can be tough to get out. If you agree to purchase a stock and it doesn't perform as well as you thought it would, the brokers may try strongly to persuade you, or even bully you into not selling the stock. This is assuming that when you call and leave a message to speak to your broker, your calls are actually returned. Once these people have your money, they often have no desire to speak to you and might claim to be "in a meeting" or "out of the office".

Movie buffs may remember the depiction of a boiler room in Ben Younger's 2000 production, Boiler Room. Told from a young broker's point of view, it shows the use of high-pressure sales tactics typical of these operations. Lines like "I am your kid's college fund" or "There will never be another opportunity like this one" are hook lines designed to intimidate and push potential investors to fork over their money.

If you ever encounter what seems to be a boiler room operation, be sure to use common sense and listen closely to the information that is given to you: don't be fooled or tempted by promises of big money. For more information, check out Wham Bam Micro-Cap Scam and our Online Investment Scams Tutorial.

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