AIM: what is the alternative investment market and should you invest?
The Alternative Investment Market, or AIM, was created by the London Stock Exchange (LSE) to help smaller companies raise capital for growth.
Since its launch in 1995, it has grown from representing 10 companies to now representing over 3,600.
But is the AIM something you should invest in? We take a look.
Why do companies list on AIM?
The companies that float on AIM usually seek to raise between £1 million and £50 million through an initial public offering (IPO).
This usually means they are changing from privately owned to public companies.
Smaller companies use AIM as a launch pad — a more accessible alternative to the LSE.
Launching in the Main Market can be very costly and presents a host of stringent demands — you must float at least 25% of your share capital, for example.
AIM doesn’t make these demands, so small, creative, entrepreneurial companies can take advantage.
How do companies list on AIM?
The process is far more straightforward than the main market.
A significant difference between AIM and other markets is the use of nominated advisers (NOMADs). These are advisers who act as regulators for the AIM.
Their task is to advise companies before and after their IPO, and they maintain regulatory compliance during this process.
Is investing in AIM riskier than other stock indexes?
AIM is essentially self-regulating, which tends to give the market a rather speculative and potentially risky reputation — packed as it is with start-ups and small companies.
This profile attracts investors with a high capacity for risk-taking, but the rewards can be substantial.
In 2020, Novacyt SA NCYT generated a return for its investors of 6,890%.
How do AIM shares perform compared with the main market?
The tables below show how a range of company share prices performed after a day, a week and a month of their initial public offering.
It compares all IPOs with the main market and AIM launches.
| First day | 2017 | 2018 | 2019 | 2020 | 2017-2020 |
|---|---|---|---|---|---|
| All IPOs | 8.6% | 8.7% | 8.5% | 6.6% | 8.3% |
| Main Market | 6.3% | 5.7% | 7.4% | 4.6% | 6.1% |
| AIM | 11.2% | 12.1% | 10.7% | 9% | 11.2% |
| First week | 2017 | 2018 | 2019 | 2020 | 2017-2020 |
|---|---|---|---|---|---|
| All IPOs | 9.3% | 10.3% | 11% | 9% | 9.8% |
| Main Market | 5.6% | 4.8% | 9.4% | 4.4% | 5.9% |
| AIM | 13.6% | 16.5% | 14.3% | 14.6% | 14.7% |
| First month | 2017 | 2018 | 2019 | 2020 | 2017-2020 |
|---|---|---|---|---|---|
| All IPOs | 8% | 9.5% | 13.9% | 1.5% | 8.4% |
| Main Market | 5.3% | 2.8% | 13.7% | -0.7% | 5.2% |
| AIM | 11% | 17.3% | 14.2% | 4.2% | 12.4% |
The relatively high percentage gain shown by AIM launches is consistent in each case.
How do you invest and trade in AIM?
You can trade and invest in AIM in two different ways:
AIM ETFs
ETFs are exchange-traded funds.
They can be traded on the stock exchange, so you can acquire a range of shares to invest in or trade.
You could invest in UK small-cap ETFs to gain good exposure to the AIM markets.
An example of a fund like this is the iShares MSCI UK Small Cap UCITS ETF.
AIM shares
If you’re comfortable choosing your own stocks rather than simply getting a pre-selected package, then trading and investing in shares might be your best approach.
You can trade shares on the AIM by selecting a suitable online trading platform.
How much does it cost to invest in AIM?
When you set up an AIM portfolio with a financial adviser or broker, there’s usually an annual management fee of around 1% plus VAT on the value of your portfolio.
There will also be dealing commission charges of about 1.65% to 1.7% on the first £10,000 consideration and around 0.5% on any balance per deal.
With AIM ISAs, there will also usually be a charge, but these vary widely — up to 4.5%, plus an annual fee of roughly 2% plus VAT.
Can you hold AIM shares in an ISA, and what are the tax advantages?
An AIM ISA allows you to run a portfolio of AIM shares, some of which are exempt from inheritance tax once you’ve held them for over two years.
There are several tax advantages with AIM ISAs, including:
- Tax-free income and growth – In common with all ISAs, you don’t pay capital gains tax on your profits and won’t be taxed on dividends.
- No inheritance tax – As mentioned, certain shares are excluded from your inheritance tax liability. They need to qualify for Business Property Relief, and you must have held them for at least two years and still be holding them at the time of your death.
- Access for all – Anyone can benefit from the tax breaks offered by an AIM ISA or AIM IHT ISA portfolio run by a fund manager. There are no minimum amounts or age requirements. The only limiting factor is the generic annual ISA allowance.
AIM: what are the pros and cons?
AIM can provide an exciting and dynamic trading environment where small, innovative companies gain access to capital and the public markets with far less red tape and regulation than usual.
However, it’s more suited for investors with a higher risk threshold and those seeking to diversify.
Also, as mentioned, the regulatory process attracts much criticism.
Considering these clear pros and cons, it would be wise to talk to a financial adviser before taking the plunge if you’re considering investing in AIM.
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