Penny stock promotions are often the product of marketing and public relations firms

Penny stock promoters love to make deals—however minor or indirect—with major, household name companies. The link with a major gives their stock promotions instant credibility, especially with investors who are willing to buy penny stocks.

When a penny stock shoots up on the news of big-company involvement, and the mineral property, unproven technology or revolutionary software is still in the early stages of development, it’s often a good time to sell.

What is a penny stock promotion?

A stock promotion launched by penny stock promoters is usually the work of their marketing departments or a public relations firm. Penny stock promotions are created to make a penny stock appear more valuable than it actually is. That’s because it’s much easier to launch a penny stock promotion than it is to create a successful, lasting business.

Stock promotions and the credibility of penny stock investments

When stock promoters get a deal with a major, promoters go to great lengths to make it seem bigger than it is. Instead of announcing that the big company has invested, say, $50,000, penny stock promoters may issue a press release that says the two companies have entered into a “multi-stage development plan.” The release may say the major has agreed to spend “up to $10 million” or whatever. It will usually provide a toll-free number or an online link for investors who wish to order the enticing brochures.

Big companies have more leverage

It pays to remember that a big company doesn’t go into a situation like this the same way you do, as an individual investor. If the big company agrees to spend $50,000 to study the mineral property, unproven technology or revolutionary software, it will also insist on a series of options that let it invest ever-larger sums on favourable terms. But the big company will always reserve the right to drop out and cut its losses. In most cases, it will exercise that right to drop out.

If it waits till the mineral property, unproven technology or revolutionary software has proven itself, development rights will be much more costly. So it gets in early by investing what are, for it, token amounts of money. That’s why big-company involvement by itself is never a good reason to buy a penny stock.

Stock promotions and the success of penny stocks

Multiple independent discoveries often happen in the investment world. New companies form with similar discoveries and similar business plans. Sometimes they co-exist for many years. That’s how it worked early on with the automobile, the computer, and other major inventions.

Sometimes, the winner owes its success to marketing or management strength, rather than product superiority.

For instance, many people think the Betamax video system of the 1970s was technically superior to VHS. But Betamax still lost out to VHS, which offered longer playing time from a single cassette. Of course, both systems soon lost out to the DVD, which in turn is losing out to far more advanced forms of information storage and retrieval.

Investing in penny stocks and stock promotions

You need to keep this natural process in mind when you think about investing in a penny stock such as D-BOX (symbol DBO on Toronto). The company is a pioneer in motion picture-enhancing technology. You could plausibly argue that it has a huge future, and that the stock will create fortunes for investors. But plausible arguments and successful investments are two different things.

D-BOX Technologies Inc. is a maker of technology for enhancing the experience of movies, amusement park rides and training simulators.

The company mainly sells its products to movie theatre operators. Once that technology is placed inside theatre seats, it causes them to sway and vibrate during the film. D-BOX is also able to synchronize the movement of the chairs to match the action on the movie screen. It uses digital codes with visual and sound cues embedded in them.

D-BOX has installed (or is contracted to install) its system at 528 movie screens in 30 countries. Its customers include large chains like Cineplex in Canada and Cinemark in the U.S. The company has also adapted its technology to home entertainment and video game systems.

We do think D-BOX offers you far better odds for substantial long-term profit than you get from the vast majority of penny stocks. But the company faces formidable competition from many larger and better-established companies. Future competitors may have better connections with the film industry. Then too, film-goers may tire of the D-BOX experience before the installation pays for itself.

Have you invested in a stock to find out that its stock promotions made it seem more valuable than it actually was? What happened next? Share your experience with us in the comments.