Tag: penny stock promoters

What are penny stock promoters?

It’s much easier to launch and promote a stock than it is to start a successful, cash flow positive business. As a result, penny stocks do attract more than their share of stock promoters and shady dealers. Penny stock promoters love to make deals with major, household-name companies. They’re sure the public is far more likely to buy penny stocks that have agreements with a major mining company to finance exploration of their mining claims, or if a big tech firm has agreed to make them a “channel partner” and perhaps someday sell their revolutionary software or “cloud” application. The link with a major gives them instant credibility, especially with investors who are willing to buy penny stocks.

However, when stock promoters manage to make a deal with a major firm, they often go to great lengths to make it seem bigger than it is. Instead of announcing that the big company has invested, say, $50,000, a stock promoter may issue a press release saying the two companies have entered into a “multi-stage development plan.” The release may say the major company has agreed to spend “up to $10 million” or some other exalted figure.

If the big company agrees to spend $50,000 to study the mining property, new technology or pioneering program, 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.

A major mining company will gladly spend $50,000 many times, and lose every penny of it, if this means it will get a chance to develop the one rare project that’s ultimately worth an investment of, say, $500 million. If it waits till the property, technology or program has proven itself, development rights will be far more costly. So it gets in early by investing what are really just token amounts of money for a major firm. That’s why big-company involvement by itself is never a good reason to buy penny stocks.

There’s room for penny stocks in a small part of your portfolio, but at TSI Network we recommend using our three-part Successful Investor strategy:

  1. Invest mainly in well-established companies;
  2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
  3. Downplay or avoid stocks in the broker/media limelight.

The key to finding the “hidden gems” in penny stocks is to understand and avoid the risks that go with them. You get the benefit of Pat McKeough’s decades of experience—and his specific recommendations—in our special report, Canadian Penny Stocks: What You Need to Know about Handling the Risks and Reaping the Rewards.

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