The pros and cons of buying shares on the Alternative Investment Market (AIM)

 
Elliott Haworth
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For early stage companies finding their feet, the Alternative Investment Market (Aim) offers a means to access capital to support growth, with the prestige of a public listing on a London exchange.

Launched in 1995 with just 10 constituents, the market has rapidly become one of the most successful growth markets in the world, spawning successes such as Asos, Domino’s and myriad other household names.

Successful perhaps, but Aim certainly hasn’t been without its ups and downs. A casualty of the dot-com bubble, accusations of “casino” like behaviour throughout the noughties, and masses of delistings due, in part, to the loose regulatory framework that sees highly speculative companies going public, have precipitated a cloud of caution for investors.

It’s not the Wild West: get your Aim right, and the rewards can be bountiful; but Aim wrong, and you’ll shoot yourself in the foot. Here are the pros and cons for private investors:

PROS

Huge potential growth

The main attraction of Aim is the potential to make the sort of rapid gains blue chip investors could only dream of. Take a company like Sound Energy. Following several successful gas discoveries, its share price increased over 440 per cent from the end of June last year to the beginning of this month – gains unheard of on the FTSE. “There are a lot of exploration companies and gold explorers which take a lot of risk on trying to discover new resources,” says Adrian Lowcock, investment director at Architas. But if the gamble pays off, and investors get wind, the share price can rocket – gains of 20 per cent in a day aren’t uncommon.

Stamp duty

With most markets, when you purchase shares, there is a 0.5 per cent stamp duty charge per transaction. However, in a bid to encourage investment, in 2014, George Osborne (remember him) scrapped stamp duty on recognised growth markets, including Aim.

Inheritance tax

Purchasing Aim shares can help you avoid inheritance tax. The Business Property Relief scheme was created to prevent those inheriting a business from having to sell assets to pay inheritance tax. Only around 70 per cent of Aim firms qualify for full relief, due to criteria that specify companies with dual listings are exempt, along with stocks that deal primarily with stocks or shares, land and property, among others. You have to hold the shares for a minimum of two years, and the rules are constantly changing, so it may be advisable to access such stocks through a dedicated fund manager.

Hold them in an Isa

You can hold Aim stocks within an Isa, with all the tax benefits that implies. You can also invest through a venture capital trust (VCT), which provides 30 per cent income tax relief on contributions up to £200,000 in a year, along with exemption from tax on capital gains and dividends. Lowcock warns, however, to never let tax relief incentivise your investment. “The saying is never let the tax tail wag the investment dog. An investment should make sense irrespective of the tax relief as if you lose 100 per cent of the investment you have still lost more money than you get back in tax relief.”

CONS

Huge losses

For every big winner, there is an even bigger loser, and far more of them. According to data from the London Stock Exchange, 103 companies were delisted from Aim last year, compared to 55 IPOs. Firms on the junior market are often highly speculative, and the gamble doesn’t always pay off. “Most companies on Aim never live up to their expectations and either collapse or tread water for years on end,” says Lowcock.

Liquidity

When you’ve bought stock in an Aim listed company that starts to fail, you might have little option but to watch it crash to nothing. “Liquidity is usually not a big issue for small investors but it becomes an issue at times of crisis or stress in the company,” Lowcock says. The liquidity of an asset is a measure of the degree of ease to which it can be sold, and if you wish to sell, you might struggle to find a buyer – even at a loss.

Dividends

For investors looking to draw an income from their investment, larger, blue chip companies often offer a dividend. It’s not unheard of on Aim – many do offer a dividend – but largely, profits are reinvested to help the business grow.

Bad vibes

The number of Aim’s disasters and total losses significantly exceeds the number of success stories. Investing in small, unproven companies is inherently riskier than backing larger, more predictable ones, and Aim’s annualised total return of -1.6 per cent a year (between 1995 and 2015) will hardly fill investors with joy. Over the same period, data compiled by Hargreaves Lansdown showed that the FTSE Aim Index, comprising all Aim stocks, had delivered a total return of minus 17 per cent since its launch.

Lack of information

Aim companies tend to be under-researched by comparison to their larger counterparts meaning your decision to invest will have to be based heavily on your own research. Many Aim stocks have no independent analysts following them at all. Some “do pay for research but the market perception is that such research is biased,” says Paul Blythe, corporate finance partner at Crowe Clark Whitehill. “From an investor’s perspective, stick to those companies that do have research notes issued on them and be sure to identify who is writing them.”

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