AIM is the London Stock Exchange’s international market for smaller growing companies. Back in 1995 when it launched the Alternative Investment Market (AIM) was something of a mystery. However, it has grown over the years into a recognised and much-loved market for investors and traders alike. It is open to start-up companies from around the world who are aiming to raise capital for their businesses. Considered the most successful growth market, the AIM is an entrepreneurial playground and is home to some 1,100 companies across multiple sectors – that’s three times as many as the FTSE 350.
AIM is a highly successful market, which continues to provide a strong platform for entrepreneurial businesses to raise capital. In fact, research from TD Direct Invest found that traders’ interest in AIM is continuing to grow with the company witnessing a 36% rise in trades on its platform since the start of 2013. Recently stamp duty was removed from AIM Shares and now shares traded on small and medium-sized exchanges are even allowed to be held with an ISA. This did more than offer cheer for company directors of listed small cap firms, it also captured investors’ imaginations once more, encouraging traders to look again at opportunities they may not have considered in the past.
“Very low priced stocks carry a higher risk compared to blue chips. A move of just 1p on a 10p shares is equivalent to a 10% gain or loss without even utilising any leverage. As such its much harder to control risk and this is one reason most providers don’t even quote small cap shares.”
You should be able to find most AIM stocks and small caps at IG Index. However, I would never encourage people to focus all their attention on penny shares, or in my case smaller cap, higher risk companies. Having said that, I don’t see any harm in them if your trades are done with strict limits on pot percentage (and try to steer clear of the ones riddled with debt). The main problem with small caps and AIM stocks is slippage/gapping – which means that stop orders are sometimes unable to be filled at the preset levels (so spread betting companies will execute them at the next best level).
One tactic I use is to keep a close eye on the investments that successful penny punters (like John Mckeon, Bruce Rowan etc) have made in the past and are currently making to try to understand what makes one a success and which are worth looking at.
Just keep in mind that at the end of the day smaller growth companies are higher risk than a blue-chip and the sector can be quite risky. Most long term investors and pension funds in particular tend to favour the bigger companies as these serve as a haven during times of financial turmoil. Such companies tend to have stronger balance sheets and a more diversified reach than the smaller AIM companies so more likely to survive a downswing. Smaller caps in particular tend to depend on a single product or service or a particular company or region and their cash reserves are normally modest and generally their access to capital will be more restricted.
It is true that the spread on certain AIM companies can be quite narrow but spread betting providers insist on higher margins for these stocks for good reason – some small cap stocks can be particularly illiquid and volatile and it is not uncommon for margins to be as high as 50% or more. The spread will, however, depend greatly on the liquidity – the more liquid the share, the narrower the spread.
Your job is to weigh up the positives against the negatives. Quotes for most small caps are normally market-maker controlled as opposed to relying on automatic quotation (as with FTSE 100 shares). Such stocks can also be prone to choppy moves and are thus harder to analyse with technical analysis. Technically a penny share is one that trades below 100p-a-share, but in reality all companies with valuations lower than £50 million fall within the small cap spectrum.
On a spread bet you can suffer from material losses if you get caught on the wrong side of a move with an Aim company since it is not always easy to unwind positions. Penny punts need to be well researched, particularly their longer term history which may give clues as to why they have failed in the past. You can then see if what you are hoping for in the future has already been hoped for and disappointed time and time again – this is often the first reason a share has a very low share price; the BOD making promises or having aspirations that they keep failing to fulfill and the market loses faith in them.
Don’t lose sight of the fact that you can swing trade fairly short periods from a few days or months in which case the fundamentals aren’t so critical. A pure momentum trader doesn’t really need to look so much at the financials but more on what latest news is driving the share price. If you are looking longer term then the financial fundamentals play a bigger and bigger priority in your stock selection.
As for penny shares, I tend to regard my buys in penny shares as investment and not trades. I have some good penny share investments but because I intend holding until there is bad news the good news that makes me invest has to be really exceptional. Penny shares are not the fodder of elite investors, but they definitely can be a bit of fun! Catching a penny share with perfect timing is the dream for many of us but the reality is that most micro companies are often unprofitable and unproven and as such turn out to be very volatile performers. Just don’t expect to make money overnight by jumping in and out of positions within days, the costs can really add up quickly there. But in value investing, they have a placement in portfolios particularly as most AIM companies don’t have the broker coverage that the majors attract.
Note: In general you should avoid oilers, gas exploration companies and companies with unproven technology – these tend to be the riskier of the bunch. Keep in mind that in general, the more exotic the market, the wider the likely bid-offer spread tends to be in pips or ticks. i.e. the bigger the market movement required to just offset the spread. The spread denotes a figures (in percentage terms) that explains the difference between the bid and offer prices (the prices at which you can buy or sell). FTSE 100 stocks can trade on spreads of as little as 0.1% but for illiquid shares the spread can be 10% or more. Beware of the size of this spread particularly for micro-cap shares. This is particularly valid for penny and to a lesser extent most AIM shares whose spreads are likely to be much wider than those stocks listed in the FTSE 100. Let’s say the spread is 20p to 24p – you could buy at 24p and sell immediately at 20p but this will net you a substantial loss in relation to your initial investment. Remember that investing in penny shares breaks two key investing mantras; first is not to lose money, and the second one is to avoid get-rich-quick schemes.
Let’s take Centamin plc for instance. CEY is a full SETS stock. The vast majority of trades are ‘AT’ (ie automatic) and represent both a buyer and a seller exchanging on the electronic market – and setting the current market price as they do so. MMs don’t come into it other than when buyers/sellers do not have Direct Market Access (DMA). At the lower end of the AIM you have SEAQ trading which is via MMs in order to provide liquidity. Otherwise most of the London market largely bypasses MMs.
“AIM shares and small caps in general are very volatile and this means that prices are more prone to gapping than FTSE shares. This means that your stops might not be filled where you expect as smaller companies’ share price can jump around a lot and you might experience slippage when exiting big positions or when you need to quickly exit a trade.”
So you actually deal in AIM shares?
I make no difference between AIM and normal shares and will largely buy the same in either, usually by buying several tranches as the trade comes good, however sometimes that is affected by what you can get from the market, otherwise said, liquidity.
In 2013 I have found lots of good quality on AIM and providing you do your research and are comfortable with what you think you know then why limit the possibilities. It is a bit like buying funds to protect the downside, it also limits the upside.
Do you ever buy much more than the normal market size on AIM stocks or smaller capitalised companies that have a small normal market size. E.g if nms was £3k would you buy £10k? Just wonder how easy it is to sell if you accumulate a lot if you pyramid up and if you have ever bought way over nms.
Speaking for myself, as someone that’s tended to have many multiples of normal market size (NMS) in AIM stocks, it really is worth avoiding crowded entries and exits. There’s also a big difference between Normal Market Size and the maximum online size, the latter can collapse whilst you’re entering figures forcing you to try again, and again. It did it to me 6 times on the trot in about 60 seconds with MBH once, right from over 50k to under 1k so beware! So it’s easy enough to accumulate when they’re unloved but try selling them at the top or on the way down and you’ll get hammered, particularly when trading online when phoning through will usually take more than 10 per cent off the price even for small tranches. Sell on the way up or into liquidity.
P.S. The greatest tip of all is only to a small amount of cash in high risk stocks (and most AIM and small caps fall under this category). Most private traders who ignore this rule get wiped out eventually. I have been trading for many years and it is amazing to see it happen time and time again. Any trader or investor who is not a millionaire should have no more than 2k risk in a high risk stock and be able to lose it all if necessary.
P.P.S. It is worth noting that from this year investors in the UK can now buy Aim-quoted shares within an Individual Savings Account (Isa) tax wrapper (they are already eligible for Self-Invested Personal Persons – Sipps). In April 2014, AIM shares will also be exempt from the 0.5% stamp duty which is charged on share purchases in the UK.