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First of all, there is no difference between demos and promos. What's called a "demo" in the UK is a "promo" in the USA. That's all. I have generally used the term "promo" to refer to all such records.
A promo is a record that is not intended to be sold (as opposed to a stock copy), but to be distributed to radio stations, music critics, business partners and/or other relevant people. Naturally, the number of promo-copies is particularly large in the USA with its numerous radio stations. Generally speaking, there are two different types of promos: promo-copies of regular records and promo-only items that are produced to promote a record that is not identical. Since promos were often produced in much smaller numbers than the corresponding stock copies, they are usually much rarer than the latter, and a natural object of interest to collectors. Note, though, that there are also cases in which the promo is much commoner than the stock copy. This
phenomenon occurred when hardly any stock copies were sold (as in the case of the US issue of The Laughing Gnome) or when the stock copy was withdrawn after the promos had been distributed (see, for instance, the All
the Madmen US single).
Promo copies of regular records can normally be distinguished from their commercially available counterparts by a different catalogue number and/or a different label design. In many countries (for example Germany, Spain, Italy) they had white labels, but sometimes other colours and designs were used.
RCA promos of Bowie records from the early 1970s had yellow labels, and from 1973 onwards they had cream labels - but most of the latter played the same song on both sides, and were promo-only records, anyway. However, there were also other ways to mark promos: sometimes promo-copies only have a sticker on the label (in which case they are not so rare, as one might expect), a promo-imprint on the cover (this is often the case with American albums), or some print on the label that indicates the promo status.
Most promo-only records were issued by the record companies that had the respective artists under contract, but in the USA there were also independent companies, such as Westwood One and DIR/King Biscuit Flower Hour, that issued promo-only radio shows (with the consent of the artist's record company, of
course). These records are of special interest to collectors, because they often contain otherwise unavailable material (like live recordings or interviews) or particularly interesting combinations of tracks.
Promos are particularly prone to being faked. Their natural rarity and the fact that they often come with a white label (which is easy to reproduce) and without a cover make them interesting to producers of counterfeits (see here for more information on counterfeits and pirate discs). There are, for example, cleverly made counterfeits of the first Space Oddity US promo-only 7"
and the An Evening with David Bowie LP. In fact, it took me some time to realise that one of my copies was a counterfeit... Sometimes these counterfeits can be distinguished from the originals only by a careful look at the matrix numbers, the label design
or the details of the cover (if there is one). The most extreme case are "counterfeits" of promos that might not even exist: there is a Teenage Wildlife US promo-EP that some people consider to be a fake - that is, all circulating copies are pirate discs! Since I don't have a copy myself, I don't feel qualified to make any claim about the authenticity of the item.
To sum up, promo-records are a fascinating area for collectors - but be careful...