If only it were that simple!

Stock promotion has been around for decades and when done for the right reasons, can provide potential investors with an opportunity to get in on the ground floor of an up and coming company. Unfortunately, like all good things, there are just enough bad seeds out there to give the whole investor awareness industry a bad name. Far too many investors have been caught in a game of pump and dump. Perhaps a look from the investor awareness side of things will help you avoid being caught.

Why do companies hire investor awareness firms?
Many small businesses are great at what they do. Many have found their own niche and continue to build their company. The problem is, they have difficulties getting the word out about their success story. As such, with no new investors, the share price remain stagnant, and long time insiders are unable to either raise money to finance growth, or to cash out some of their hard earned equity.

An investor awareness firm can help publicly traded companies get the story out to newsletter subscribers. With the facts in hand, these subscribers may decide to turn into investors. The more investors out there, the more opportunity for everyone to make money.

What should you, the subscriber, be aware of?

a) Investor awareness firms are paid a fee. It costs money to generate campaigns, press releases, newspaper articles etc, and the fee helps to compensate for these expenses, as well as pay for the firms time in creating the campaign. These firms are either paid out in cash, or if the investor awareness firm feels strongly about the future of the company, they may become shareholders. If the share price moves up, their compensation moves up also. Quite the incentive to do a great job for the company.

Its recommended that if the newsletter you subscribe to receives shares for their compensation, find out if these are restricted shares, or free trading shares. If they are free trading shares, you may end up buying their shares as the firm sells to cover expenses. Not all firms sell immediately, so its best to make sure. If the shares are restricted, its a safe bet that you and the firm are in it together for at least the life of the campaign or until the shares become unrestricted.

Most campaigns last 1-3 months, but many firms in fact provide coverage past that point.

b) Watch for insider selling. While there is nothing wrong with an insider monetizing their investment, if you see a substantial number of shares being sold at the same time as the campaign is going on, you may find yourself buying shares from the insiders and be left holding them for awhile.

Remember, if the company outlook is so bright, insiders will know better than you, and will hold knowing they will eventually get a much, much higher price.

c) Pump and Dump – its not just insiders you have to worry about. Its in the best interest of a company who has been compensated with shares in the company to see the share price move higher. Watch for an overly bullish spin on stocks that are being promoted by those who have received shares in the company. Find out if the firm has to hold the shares for a period of time, or are they able to sell the shares anytime. If there is a restriction placed on the sale of shares, you stand a better chance of making money on an even playing field.

Most credible newsletters will provide their subscribers with the facts and let the information speak for itself. You dont need to spin a good story: it spins itself!

d) Do your own due diligence – is this company making money? Do they have a product that will be in demand in the future? Is the company creating new products? Investing in penny stocks is no different than investing in large caps; only the risk is different. Ask the questions and only invest when you feel 100% behind the company.

Don’t automatically assume that just because an investor awareness firm accepts shares for compensation means that they are part of a pump and dump scenario. Here are a couple of things to keep in mind from the perspective of the IA firm as to why they might accept shares over cash.

1. Chance for a higher payoff. If the campaign is successful, they stand to make more money. Many of the owners of these firms are also investors. If the future looks good for the company, why wouldnt they want a part of that future?

2. It may have been the only way to make the deal. The investor awareness firm will do its own due diligence before deciding that the deal is worth it. Its their money on the line. For many publicly traded companies, they may not have enough funds available to pay $50 000 or more for a high profile campaign. They may however have enough shares on hand. Once the share price is high enough, they can go after financing, providing the company with cash to finance further growth.

Can you make money when a stock is being promoted? Of course, and many investors make a lot of money thanks to the attraction of new investors. The key is to find the companies who are geniunely attempting to increase shareholder value versus trying to line their own pockets at the expense of shareholders. Only your due diligence can help you do that. Penny stocks can provide investors with a high return, however, it takes more due diligence than luck to jump onboard the right one.

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1. Penny Stocks are a penny for a reason.
While we all dream about investing in the next Microsoft or the next Home Depot, the truth is, the odds of you finding that once in a decade success story are slim. These companies are either starting out and purchased a shell company because it was cheaper than an IPO, or they simply do not have a business plan compelling enough to justify investment banker’s money for an IPO. This doesn’t make them a bad investment, but it should make you be realistic about the kind of company that you are investing in.

2. Trading Volumes
Look for a consistent high volume of shares being traded. Looking at the average volume can be misleading. If ABC trades 1 million shares today, and doesn’t trade for the rest of the week, the daily average will appear to be 200 000 shares. In order to get in and out at an acceptable rate of return, you need consistent volume. Also look at the number of trades per day. Is it 1 insider selling or buying? Liquidity should be the first thing to look at. If there is no volume, you will end up holding “dead money”, where the only way of selling shares is to dump at the bid, which will put more selling pressure, resulting in an even lower sell price.

3. Does the company know how to make a profit?
While its not unusual to see a start up company run at a loss, its important to look at why they are losing money. Is it manageable? Will they have to seek further financing (resulting in dilution of your shares) or will they have to seek a joint partnership that favors the other company?

If your company knows how to make a profit, the company can use that money to grow their business, which increases shareholder value. You have to do some research to find these companies, but when you do, you lower the risk of a loss of your capital, and increase the odds of a much higher return.

4. Have an entry and exit plan – and stick to it.
Penny stocks are volitile. They will quickly move up, and move down just as quickly. Remember, if you buy a stock at $0.10 and sell it at $0.12, that represents a 20% return on your investment. A 2 cent decline leaves you with a 20% loss. Many stocks trade in this range on a daily basis. If your investment capital is $10 000, a 20% loss is a $2000 loss. Do this 5 times and you’re out of money. Keep your stops close. If you get stopped out, move on to the next opportunity. The market is telling you something, and whether you want to admit it or not, its usually best to listen.

If your plan was to sell at $0.12 and it jumps to $0.13, either take the 30% gain, or better still, place your stop at $0.12. Lock in your profits while not capping the upside potential.

5. How did you find out about the stock?
Most people find out about penny stocks through a mailing list. There are many excellent penny stock newsletters, however, there are just as many who are pumping and dumping. They, along with insiders, will load up on shares, then begin to pump the company to unsuspecting newsletter subscribers. These subscribers buy while insiders are selling. Guess who wins here.

Not all newsletters are bad. Having worked in the industry for the last 8 years, I have seen my share of unscrupulous companies and promoters. Some are paid in shares, sometimes in restricted shares (an agreement whereby the shares cannot be sold for a predetermined period of time), others in cash.

How to spot the good companies from the bad? Simply subscribe, and track the investments. Was there a legitimate opportunity to make money? Do they have a track record of providing subscribers with great opportunities? You’ll start to notice quickly if you have subscribed to a good newsletter or not.

One other tip I would offer to you is not to invest more than 20% of your overall portfolio in penny stocks. You are investing to make money and preserve capital to fight another battle. If you put too much of your capital at risk, you increase the odds of losing your capital. If that 20% grows, you’ll have more than enough money to make a healthy rate of return. Penny stocks are risky to begin with, why put your money more at risk?

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