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.

RELATED FAQS
  1. Do I always need to use a stock broker?

    Do I need a stock broker to buy stocks for myself, even if I get a stock brokers license? Or is there a rule that makes it ... Read Answer >>
  2. What was "Operation Wooden Nickel"?

    On November 19, 2003, the Commodity Futures Trading Commission (CFTC) and the FBI announced the completion of an 18-month ... Read Answer >>
  3. There are so many stockbrokers out there. How do I go about choosing the best one ...

    If you decide that you have the knowledge and experience to take on stock investing, or if you feel you would like to give ... Read Answer >>
  4. I'm new to this. Can I sell or buy stock by myself?

    In order to buy stocks, you need the assistance of a stock broker since you cannot just phone up a company and ask to buy ... Read Answer >>
  5. Why does my IRA keep losing money?

    I have a Roth IRA and it keeps losing money. The investment firm never calls to let me know what's happening. It's ... Read Answer >>
  6. My broker just sold securities out of my account without my permission. Is this legal?

    Your broker's actions are not legal unless he or she sold the securities under certain conditions. Let's look at the two ... Read Answer >>
Related Articles
  1. Financial Advisor

    Financial Boiler Rooms Today: Real-World Examples

    High-pressure sales environments pitching inflated penny stocks or faux companies exist and cost investors millions every year. Here are a few examples.
  2. Markets

    Duck These Illegal Sales Tactics Used By Brokers

    Many unscrupulous brokers employ illegal swindling tactics to sell bad securities. Here are sales strategies that should indicate red flags to investors.
  3. Financial Advisor

    How to Dodge Brokers Using Smarmy Sales Tactics

    Many finance professionals use illegal, high-pressure sales tactics to sell bad securities to investors. Here's how to know if you're being swindled.
  4. Markets

    The Lowdown On Penny Stocks

    Think penny stocks will make you rich? If you don't understand the risks, you could end up penniless.
  5. Retirement

    Cold Call Without Getting The Cold Shoulder

    Learn how to warm up prospective clients to your business and your abilities.
  6. Financial Advisor

    5 Reasons Why Cold Calling is Dead

    Is cold calling really dead? If so, what are the better alternatives?
  7. Trading

    Is Your Broker Acting In Your Best Interest?

    Learn the clues you'll need to determine whether you've chosen a reputable professional.
  8. Trading

    4 Movies Showing the Real Side of Finance

    Read about the most accurate and realistic movies about the financial industry and the people who have to work every day in a fast-paced, high-stakes arena.
  9. Trading

    Evaluating Your Stock Broker

    Make sure you're getting the best service by staying informed and involved.
  10. Financial Advisor

    Six Rut-Busting Business Moves For Brokers

    Find out how to beat a plateau and boost your sales to the next level.
RELATED TERMS
  1. Dialing and Smiling

    A telemarketing technique in which unsolicited, or "cold" calls, ...
  2. Boiler Room

    A place where high-pressure salespeople use banks of telephones ...
  3. Boiler And Machinery (BM) Insurance

    An insurance policy that provides coverage for physical damage ...
  4. Cold Calling

    The solicitation of potential customers who were not anticipating ...
  5. Commercial Multiple Peril Policy

    A commercial insurance policy that offers at least two forms ...
  6. Carrying Broker

    A commodities or securities broker who provides back office functions ...
Hot Definitions
  1. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  2. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  3. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  4. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  5. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  6. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
Trading Center