Penny stocks are always a temptation: they look like “a way you can get in on the ground floor” on the next “home run” investment.  Of course, it helps that it is true, that many penny stocks have become “home runs”:  lots of start-ups go public on a venture exchange, sometimes via a reverse takeover, get access to public money, then grow and prosper.

But most of those penny stocks stay penny stocks, occasionally having a burst of activity because someone promotes them, a few people jump on board and they rally for a brief period of time before they go back to sleep at a few pennies per share.

This is a high risk game where those who make the money are the ones managing the price movement of the stock (THAT’S THE PROMOTER) and everyone else, except a lucky few, who landed on the name, almost by accident, saw it start to move, enjoyed the rally, bailed on a reasonable profit, then moved on, without even learning what the company was all about.  Everyone else, who bought the “story” from the promoter, fuelled the speculator’s gains and got left holding the bag.

Back “in the day”, promoters worked out of “bucket shops”.  (remember the movie, “the Wolf of Wall St”?) These bucket shops had armies of cold callers “openers”) trying to get people to buy a few shares in some penny stock they were promoting at, say $.34/share.  A few days or weeks after the first sale the buyers got calls from the “loader” who offered the new “client” the “opportunity” to take a more substantial position in their new investment – which had moved up in price!  It was HOT!  They should take advantage before it took off even more.  Why not take down, say, another 10,000 shares @ $.86…

A smart “client” would ask if that $.86 price was really the current price of the stock – get confirmation, then shout SELL!  If the client was able to get the sell transaction done, they would be one of the few members of the public who made any money.  But many of those new “clients” “loaded UP”!  The commissions were high for the openers and loaders  – and that still left sizable profit for the promoters.

When the promoter had unloaded whatever allotment of stock they had, they would lose interest in the stock immediately and move on to the next one. With loss of buying pressure, the activity on the stock would usually fall apart and the price might drift back to whatever level it had started.

Nowadays these bucket shops are history.  Most of them are gone.  So how does it take place now?  Welcome the internet, newsletters promising fabulous returns and lengthy articles expounding on the virtues of these unknown companies.  The promoters are not dead.  They have just changed their delivery model.

Welcome to the “sponsored article”.

Many websites offer legitimate investing articles – and gain large readerships due to their interesting and informative content.  Then, once they have a substantial following, they start including some “sponsored” articles in their mix. 

These articles may be provided by the promoter of a given stock. In return for a substantial fee (sometimes in the hundreds of thousands of dollars) these articles are slipped in with the other content the website offers, usually accompanied by disclaimers in microscopic print. But who reads disclaimers these days?

Sponsored articles usually start off reading like a bona fide newsletter article.  They describe, in great detail, a new opportunity to get in on an interesting sounding investment, often complete with charts, maps, graphs, and other legitimate-looking evidenceThey usually follow up the first article with subsequent ones and tempt you to take a position before the stock is “discovered” by the mainstream analysts.  Take the example of African Gold Group… a stock promoted on  sponsored articles started to appear, promoting the stock on this legitimate website… but if you read the fine print in the “important notice and disclaimer”, African Gold Group paid $50,000 US to the publisher “to produce and disseminate this and other articles and certain banner ads.”  So you can’t say you weren’t warned!  The takeaway here is to look for that sponsored ad message that usually appears, and read the disclaimer.

Another example is, which has excellent articles of their own which are totally worth reading.  But, as well, they have sponsored articles: you might start reading a sponsored article, and find it encourages you to click on a link, leading you to another website with promotional content.  Stansberry research uses Zero hedge to do this for them. On at least one occasion, an initial article encouraged the reader to register for a special on-line, live session, with authorities on the subject who went on at length, about the unsung virtues of a penny gold stack called Belo Sun resources, and encouraged listeners to get in “on the ground floor”. It smelled like the old-school bucket shop routine, and had similar results: the stock shot up to $.80 the day after the call from about $.30 or $.35, then several weeks later where was the stock?  $.40.  So, who made the money here?  Well, whoever owned shares in the promoted company, Belo Sun,  before the special on-line session, or, of course, anyone who got in and out for a quick trade!  Is Belo Sun a good long term investment?  We won’t know that for years.

So, beware of sponsored articles appearing on your favorite website. Don’t get scammed!

NOTE: does not accept sponsored articles.  We make every effort to ensure that all the articles, videos, and other content is relevant, factual, and unbiased.  Sponsored articles are never unbiased.

Tom Dusmet
Author: Tom Dusmet

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