Image Source/Getty Images Much like a marketing firm will promote their clients’ products or services, stock promoters create awareness of an investment security to increase the security’s price. It’s important for investors to know what stock promoters are and how they work, before deciding to purchase stocks or penny stocks as a result of a promotion.
What Is a Stock Promoter?
A stock promoter, by definition, is a person or business entity that directly or indirectly receives 10% or more of any class of securities or proceeds from the sale of securities. In this regard, a stock promoter may be hired by the issuing firm to represent a stock. But stock promoters aren’t always associated with the issuing company. In fact, a business may have no idea someone is promoting their stock, or gained control of enough shares to profit from a large stock movement.
Stock Promoters and Penny Stocks
Stock promoters commonly represent newer, smaller companies with less than $300 million in capitalization that may otherwise find it difficult to raise capital. These are called “microcap” or “penny stocks,” and may sell for below $5 per share. They’re considered among the most risky by the SEC. While penny stocks may be found in the major market exchanges, many sell in a smaller “over the counter” trading market, such as on OTC Markets, where reporting regulations are not as stringent. Publicly available information about penny stock companies isn’t always readily available, making it difficult to investigate claims made by stock promoters about products and profits. These stocks are not as tightly regulated as the larger stock offerings, and are thinly traded, also known as low volume. This loose regulation may introduce opportunities for market manipulation. Every year, the SEC and Department of Justice investigate and prosecute stock promoters for criminal and civil violations, which include market manipulation, lack of disclosure, and false claims that defraud investors. Not all stock promoters are involved in fraudulent or unethical practices, but the OTC Markets Group Policy on stock promotion states, “We believe stock promotion is misleading and manipulative when information is publicly disseminated to disrupt the efficient market pricing of a security.”
How Stock Promoters Work
Promoters use marketing techniques in a variety of formats. To reach potential investors, stock promoters may use a variety of marketing techniques and media types, such as websites, social media, and print ads in financial news publications. The tools stock promoters use to do their work include:
Social media and chat rooms: Stock promoters can target certain demographics to reach potential investors via social media platforms, such as Facebook, Reddit, Twitter, and Instagram. Emails and mailings: This involves sending promotions via email to a large number of potential investors, whether through email or physical mail. Online advertisements: Pop-up ads and other advertising can reach readers of other websites. Reports and investment newsletters: Stock promoters may create reports that provide specific details about the promoted stock. These details may include financial reports of the company issuing the stock.
Penny Stock Promoter Warning Signs
Some stock promoters choose to promote penny stocks for purposes that may be harmful to investors. Watch out for these warning signs:
SEC suspension of public trading of securities associated with a promoter, aggressive sales tactics, guarantees of high returns, and unsolicited advice.Some promoters are also guilty of “touting” or promoting a stock without disclosing their financial interest in the stock or the issuing company. Be wary of vague, buried, or absent disclosures. Promoters should disclose whether they’re being paid, by whom, and how much they’ll be paid, including commissions.A company’s stock price or trading volume increases after promotional activity, or the company-issued shares without an increase in the company’s assets.In extreme cases, beware of a “pump and dump” scheme: A group of investors could inexpensively buy large blocks of a penny stock, making the price move higher. Higher prices attract other investors who, unaware, participate in a buying frenzy. The original scammers sell shares and stop promoting the stock. Uninformed investors are left with worthless stocks and large capital losses. Watch out for misleading business information. No business operations (few assets, minimal revenues), misleading press releases or events, or frequent name changes or changes to the types of business are strong indicators.
Some markets, such as OTCmarkets.com, display warning icons if a stock shows signs of manipulative or misleading stock promotions. Online forums may also collect and distribute lists of stock promoters and websites that you could review. Penny stock promoters can take advantage of loose regulations to promote stocks in a way that is misleading to investors, influencing them to buy a low-quality stock. The result: The company raises quick capital with increased stock prices and your investment, although what they do with it may be opaque.
The Bottom Line
Remember the contract-law phrase “let the buyer beware.” If the story surrounding a stock sounds too good to be true, it probably is. For this reason, thoroughly research and analyze any stock you’re considering for purchase, and any stock promoter you’re listening to. Be cautious if you can’t verify claims through independent, publicly available sources. Although stock promoters aren’t always seeking to defraud investors, they are incentivized to push the stock price higher through the use of marketing techniques.
