Here at Penny Sleuth, we’ve warned for a while about the dangers of blindly pulling company names from the message boards where penny stock pumpers lurk. Those guys make money by getting people to artificially inflate the prices of penny stocks and leave the investors holding the bag.

But it’s not just the message boards anymore – today’s penny stock pumpers are more deceptive than ever. That’s why I’m going to tell you how to beat them at their own game…

While we’ve never accepted money to write about any stock here at the Sleuth, some in the industry do…

These so called “stock promoters” are publishing faux research reports and stock recommendations in hopes that investors will catch on to the penny stocks they’re selling. They do this through websites and newsletters that seem legitimate on the surface, but are essentially nothing more than schemes to get people to buy these stocks.

So, how does this all work?

Well, penny stock promoters approach small-cap companies and offer to get people to buy their stock in exchange for a fee – usually thousands of dollars in cash or the company’s stock.

Last year, one big penny stock promoter got paid $167,000 to tell their subscribers the name of a company they were trying to boost in value, all while their subscribers were paying for what they thought was a legitimate investment newsletter.

And believe it or not, it’s completely legal as far as the SEC is concerned.

Even solid penny stock companies pay for penny stock promoters to tout their stocks. While that may seem surprising at first, the reason isn’t as underhanded as you’d think: they want their stocks to trade.

Stocks pay the big bucks to stock promoters in order to get additional trading volume.

How to Spot a Promoter

There are a few ways that you can tell whether a stock’s being pumped by a promoter. For starters, go to the horse’s mouth – check out StockPromoters.com – the site features a listing of which stocks are paying for which promoters, as well as what the promoters are getting in return.

Promoters aren’t ashamed about what they do – they want companies to know how good they are at their jobs…that’s why they’re so easy to spot.

If you’re looking at a website, and you’re not sure if it’s legit, one of the surest ways to tell is by reading their disclaimer. To stay in the SEC’s good graces, stock promoters are required to disclose every company that compensates them in exchange for promotion, as well as third parties who pay them to promote stocks they hold.

Is Stock Promotion Always Bad?

Until now, I’ve been telling you about the dangers of penny stock promotion. Truth be told, there are some potential plays to be made off of penny stocks being pumped up on no fundamental news.

While that’s a bit too speculative for the pages of the Penny Sleuth, we do watch those kinds of plays on our Twitter feed, which you can follow here…

Hopefully, you’ve gotten a handle on catching potential penny stock promoters in the act. Next time, we’ll look at some more upbeat small-cap news.

Cheers,
Jonas Elmerraji

April 7, 2009

Jonas Elmerraji

A big-four public accounting alum, Jonas Elmerraji brings his readers extensive expertise in small-cap stocks and broad market moves. Elmerraji’s interest in the market started with an investing course in elementary school – today he holds a degree in financial economics from UMBC and specializes in blending fundamental and technical analysis. Elmerraji has contributed to Forbes, TheStreet.com, and Investors Business Daily among others. He is managing editor of the Penny Momentum Trader, and a co-editor of Penny Stock Fortunes.

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