For those of you unfamiliar with the Alternative Investment Market (AIM): it was launched in 1995 as an alternative to the Main Market of the London Stock Exchange (LSE). AIM targets smaller, unproven companies that want to raise capital to finance the development and growth of their businesses.
AIM is not a regulated market, although it is owned and operated by the the LSE in its capacity as a Recognised Investment Exchange. AIM is classified as a Multilateral Trading Facility (MTF).
While AIM is unregulated, there are strong corporate governance rules and procedures in place. That said, the admission criteria for new entrants is relatively relaxed compared to the Main Market. For example, there is no trading record requirement (three years for the Main Market) and no minimum market capitalisation.
The level of flexibility provided by AIM has proved very popular with companies and since launch 3,988 companies have joined AIM, of which 852 companies remain listed (figures correct as at 31st July 2023).
What’s the appeal of investing in AIM shares?
Somehow, penny shares listed on AIM seem to have captured investors’ imaginations much more than say ‘ordinary’ shares listed on the Main Market or investing in mini-bonds or peer-to-peer lending.
Picking a winner on AIM can mean a return on investment that is unimaginable in any other asset class. In simple terms, AIM offers investors the chance to make a lot money, if they are very, very lucky.
Arguably, the most high-profile AIM winner is ASOS (LSE: ASC), the online fashion retailer, which was listed on AIM in October 2001 at a price of 20 pence per share. By October 2014, its share price had reached £71 per share and it had a market cap of £5.9 billion.
Had you invested £1,000 in ASOS on its launch it would have been worth £162,130 at its peak. As at 31st July 2023, ASOS remains listed on AIM and trades at £4.15 and has a market cap of £494 million.
Apart from the slim possibility of making a small fortune, the main appeal of investing in AIM are the tax incentives offered. Since 2013/14, AIM shares can be held within an ISA wrapper, which means no tax liability on capital gains (profits) or dividend income.
In addition, there is no stamp duty payable on the share purchase price (saving 0.5%) and provided that certain qualifying shares are held for at least two years, there is no inheritance tax (IHT) payable.
Qualifying shares exclude for example investment funds and property businesses: they are not eligible for IHT relief.
What’s the downside of investing in AIM?
Apart from the serious risk of capital loss which can be seen from the findings of the Dimson and March analysis, AIM can be a volatile, unpredictable and irrational investment environment.
Share prices tend to move sharply on specific news events and sentiment and in the absence of news, share prices tend to drift downwards.
In addition, shares in certain, smaller companies can also be quite illiquid with very low trading volumes; so, it can occasionally be difficult to get a dealer price quote when selling shares above a specified amount.
There is also the exposure to higher spreads on share prices. The spread is the difference between buying price and selling price offered by market makers. Spreads can be as low as 2% to 3% but in some of the more illiquid shares, it is not unknown for spreads to be as high as 8% to 10%.
The impact of buying a company with this higher spread means that you could be down as much as 10% on your investment as soon as you buy it.
One final point: while AIM listed shares can be placed in an ISA wrapper which means no capital gains tax liability on profits, any capital losses that you incur within an ISA wrapper cannot be offset against gains made on other shares that you hold.
The capital loss is not tax deductible, whereas, if the AIM shares were held outside the ISA wrapper, then there would be tax relief.
Investing in AIM
If you are thinking of investing in AIM shares and want to learn more about the share price performance of companies listed on this market, then please click here.
