What Is a Boiler Room Operation?

In the context of investing, the term 'boiler room operation' refers to an outfit using 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 a commission. 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 or 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. They are also willing to go to great lengths to swindle you. Some of these so-called 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 to persuade or even bully you into not selling the stock. This is assuming that your calls to your broker are actually returned. Once these people have your money, they often have no desire to speak to you, their answering machines or secretaries suddenly claiming that they are perpetually 'in a meeting' or 'out of the office.'

Movie buffs may remember the depiction of such a disreputable financial operation in Ben Younger's 2000 film Boiler Room, and, more famously, in Martin Scorsese's 2013 The Wolf of Wall Street. Lines like "I am your kid's college fund" or "There will never be another opportunity like this one" are hooks designed to intimidate and push potential investors to hand 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 being given to you. Don't be tempted by promises of big money, or you'll end up the fool. Remember: if it sounds too good to be true...