What is a Stock Promoter?
A stock promoter is an individual or company that promotes stocks with the aim of influencing potential investors to buy shares of a particular company. Stock promoters can represent a variety of clients in various market sectors, or operate anonymously without disclosing the original source of the stocks.
The role of stock promoters is similar to that of a marketing company that promotes its clients’ products or services, as stock promoters aim to increase awareness of the investment’s safety to boost the security’s price. It is important for investors to understand what stock promoters are and how they operate before making a decision to purchase stocks or penny stocks as a result of a promotional campaign.
Note: Promoting stocks can lead to price manipulation and fraud.
Stock Promoters and Penny Stocks
Stock promoters typically represent smaller, newer companies that have a market capitalization of less than $300 million and may find it difficult to raise capital. These stocks are referred to as “microcaps” or “penny stocks” and may trade for less than $5 per share. These stocks are considered among the most dangerous according to the U.S. Securities and Exchange Commission.
While penny stocks can be found on major exchanges, many are traded on smaller “over-the-counter” markets, such as OTC Markets, where reporting regulations are less stringent than those on major exchanges.
Information available publicly about penny stock companies is often not readily accessible, making it challenging to verify claims made by stock promoters about products and profits. These stocks are not as tightly regulated as larger stock offerings, trade infrequently, and are also known as low-volume stocks.
This loose regulation can open the door to market manipulation opportunities. Every year, the Securities and Exchange Commission and the Department of Justice investigate and prosecute stock promoters for criminal and civil offenses, including market manipulation, nondisclosure, and false claims that defraud investors.
Note: Check the background of anyone recommending that you buy a stock using the SEC’s IAPD website or FINRA’s BrokerCheck website.
How Stock Promoters Work
Stock promoters use marketing techniques in various forms. To reach potential investors, stock promoters may utilize a variety of marketing techniques and media types, such as websites, social media, and print advertisements in financial publications.
Tools that stock promoters use to perform their work include:
- Social media and chat rooms: Stock promoters can target specific audience segments to reach potential investors through social media platforms like Facebook, Reddit, Twitter, and Instagram.
- Email and newsletters: This involves sending promotional offers via email to a large number of potential investors, both through email and physical mail.
- Online advertising: Pop-up ads and other advertisements can reach readers of other websites.
- Reports and investment newsletters: Stock promoters may create reports that provide specific details about the promoted stocks. These details can include the financial reports of the company that issues the stocks.
Warning Signs of Penny Stock Promoters
Some stock promoters promote penny stocks for purposes that may be harmful to investors. Beware of these warning signs:
- Comments from the U.S. Securities and Exchange Commission on the public trading of securities linked to a promoter, aggressive sales tactics, promises of high returns, and unsolicited tips.
- Some promoters are also guilty of “pump-and-dump” schemes or promoting stocks without disclosing their financial interest in the stock or the issuing company. Be wary of vague, buried, or absent disclosures. Promoters must disclose whether they are being paid, by whom, and how much they will be compensated, including commissions.
- Increased
The stock price or trading volume after the promotional activity, or the company’s issuance of shares without an increase in the company’s assets. - In extreme cases, beware of the “pump and dump” scheme: A group of investors can buy large blocks of a low-value stock at low prices, causing the price to rise. The higher prices attract other investors who join in the buying frenzy. The original scammers sell the shares and stop promoting the stock. Uninformed investors are left with worthless shares and significant capital losses. Beware of misleading business information. No business operations (few assets, minimal revenues), misleading press releases or events, or frequent name changes or changes in types of business are strong indicators.
Some markets, such as OTCmarkets.com, display warning symbols if stocks show signs of misleading promotion or stock manipulation. Online forums may compile and distribute lists of stock promoters and sites you can review.
Low-value stock promoters may take advantage of loose regulations to promote stocks in a misleading way to investors, influencing them to buy a low-quality stock. The result: the company raises capital by increasing stock prices and your investment, even though what is being done with it may be opaque.
Conclusion
Remember the contractual law phrase “let the buyer beware.” If the story surrounding a stock seems too good to be true, it probably is. For this reason, conduct thorough research and analysis on any stock you consider buying, and any stock promoter you listen to. Be cautious if you cannot verify claims through independent and publicly available sources. Although stock promoters are not always seeking to defraud investors, they are incentivized to drive the stock price up through marketing techniques.
Source: https://www.thebalancemoney.com/stock-promoters-definition-what-they-do-and-why-5025038
Leave a Reply