Penny Stocks and the Price of Promotion

Did you ever get one of those glossy pieces of literature in your mailbox that seems to say, "BUY THIS PENNY STOCK AND IT WILL MAKE YOU SO RICH THAT YOU WILL NEVER HAVE TO WORK AGAIN." Only to buy the stock and find your yourself 3 weeks later commuting to the job that was supposed to be in your past after you bought that next great stock tip. Look at the disclaimer and you may see that the cost of this advertising campaign was about $500,000. If the entity conducting the advertising campaign was paid in stock, then assume that at least $500,000 worth of stock will hit the market to pay for that campaign. If the entity was paid in cash, you could assume that stock was swapped for cash and therefore, someone will sell at least $500,000 worth of stock or they would be really dumb to hand someone $500,000 and not be reasonably assured that they were getting at least $500,000 in stock back. So why would a company pay this much money to promote the stock?

The pundits will all say a PUMP and DUMP has been initiated but that's not necessarily the case. In many cases, any small company's financing possibilities are based on the liquidity in the stock. In the financing markets for penny stocks, it has become very difficult to finance these companies with retail investors. The majority of financings are now conducted with institutional investors. Unlike conventional wisdom, many institutional investors have a shorter term investment horizon than retail investors. Therefore, liquidity in most cases will completely override the merits of the investment. At the cleaners, we say, no ticky, no laundry. In the world of penny stock financing, no liquidity, no money PERIOD


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