Investors who purchase or sell stocks listed on the OTCBB or Pink Sheets quotation systems need to familiarize themselves with the concept of stock promotions.
Simply put, a stock promotion is an effort to raise investor awareness for a particular company. Stock promotions are a simple, but very effective, method of getting the attention of a targeted demographic of investors.
Stock promotions can come in many forms. The most typical form of a stock promotion is an email newsletter that is mass-mailed to a large list of subscribers. A promotion may also take the form of a special-purpose website that has been specifically created for the sole purpose of promoting a particular company. Less common forms of promotion may include multiple postings on an investing message board, fax transmissions, mailers, cold-calling, and magazine advertisements.
To determine who is responsible for a promotion, a trader should ask herself who is the most likely to benefit financially from the promotion. We will refer to this person, or group of people, as the 3rd party. Typically, the third party is an investor, a company officer (such as the CEO or CFO), or it may be the promoting entity itself. We will discuss the motives each may have for promoting a stock individually.
Individual investors using stock promotion services
If an investor owns shares in a particular company, there may come a time when the investor wishes to sell and move on. The reasons for liquidating a stock are numerous and for the sake of brevity we will omit many of them here. In the case of stocks traded in the OTCBB and Pink Sheets quotation systems, an investor with a large block of shares will opt to sell when they are confident that the stock price will depreciate in the near future. It is usually the case that the investor owns a large block of shares that they have accumulated over a long period of time. However, there are also individuals who purchase large blocks of shares with the intention to sell back to the public within a short period of time.
Regardless of how the investor came to own the shares, they cannot easily liquidate them all at once. Typically, the investor would be able to sell the whole lot of shares if the stock were listed on a magor exchange such as the NASDAQ, NYSE, or TSX because of the inherent liquidity of stocks listed on those exchanges. Conversely, stocks that trade on the OTCBB or Pink Sheet quotation systems are very illiquid. It is because of this illiquidity that an investor is not able to sell large blocks of shares without causing a drastic and rapid decrease in the stock's share price. This is one of the reasons an investor will pay for a stock promotion - to create enough liquidity (by increasing buy volume) so they will be able to sell the bulk of their shares as other investors are buying.
It is important to note that while the promotion is occurring, this 3rd party with the large block of shares is selling at the exact time that others are buying (in response to the stock promotion).
Company officers using stock promotion services
Officers of a company (CFO, CEO, directors, etc.) are typically alloted large blocks of company shares when the company is first incorporated or as payment for services rendered. The shares are given to these individuals with the intent of encouraging active development of the company and its eventual rise to profitability. If the company becomes profitable, these officers with their large blocks of shares are able to sell (after a certain period of time) and potentially reap large financial benefits. However, profitability for a company listed on the OTCBB and Pink Sheets is difficult to achieve, most never reach this stage and are perpetually listed as "development stage" companies - even many years after incorporation. Eventually, there are more reasons for these individuals to sell their shares than there are to hold those shares.
If for any reason these individuals decide to sell, they must do so when the amount of buying is equal to, or greater than the amount of selling that would occur when these individuals liquidate their shares. One strategy to generate the necessary buy volume is to employ the services of a stock promoter. Again, the stock promoter is the one who will then be responsible for generating enough investor awareness to bring in the needed (buy) volume. What is unique to this particular scenario is that the company officer involved in this promotion may be authorized to issue a press release whose timing is likely to coincide with the activity of the stock promotion. The combination of a press release and a stock promotion is usually more than sufficient to grab the attention of potential investors.
Stock promoters using their own resources to promote a stock
Stock promoters will also promote a stock when they are able to benefit financially. A stock promoter has the means to draw investor attention to any given stock he or she is interested in promoting. If a stock promoter has access to a large list of email recipients (subscribers), then this list is at the disposal of the promoter who will use it to his or her advantage. Stock promoters will often front-load a stock before they actively begin promoting it. A front-loaded stock is one that is bought into heavily before a major increase in price or significant investor attention is anticipated to occur. The promoter will buy a large quantity of stock in a particular company over a period of days or weeks. The promoter then releases a newsletter which usually purports to have found an unknown (and undervalued) company that the promoter claims will be the next Google, Walmart, or Facebook. The content of these newsletters is usually grossly exaggerated and full of half-truths. Finally, once the promoter has garnered enough attention to his or her profiled stock, they sell their shares at the same time his or her newsletter subscribers are purchasing.
Stock promotions should be carefully scrutinized as the uninformed investor who follows the advice of a stock promoter will almost certainly lose his or her entire investment. However, a seasoned OTCBB trader can capitalize on the dynamics of the OTCBB and the ever-present stock promotion if they recognize what stock promotions are, who is behind them, and what the eventual outcome is likely to be.