One must be careful spread betting on the AIM market. The Alternative Investment Market (AIM) is very different from the traditional markets attractive to spread betting customers i.e. Large cap stocks, fx , index and commodities.
What is the AIM market?
Here’s what the LSE has to say about it…
AIM is the most successful growth market in the world. Since its launch in 1995, over 3,600 companies from across the globe have chosen to join AIM. Powering the companies of tomorrow, AIM continues to help smaller and growing companies raise the capital they need for expansion.
Aim is the junior market of the London Stock Exchange and often acts as a feeder to companies that do well. Once of the key elements of AIM is that the value of the companies listed on the exchange are smaller and less liquid. this means that they are harder to trade. On the LSE, stocks are liquid, spreads are tight and there is always a happy appetite for trading. Volatility is around 7.5% to 1% per stock which means margins can be high too. In some cases you can get as good as 2.5% intraday.
Best spread betting brokers for trading AIM stocks
The best spread betting brokers give access to stocks on AIM but and here are the key points of spread betting on AIM…
Watch out for the spread on AIM stocks
Just because the market is quoting 12.5 bid 13 offered on your screen it doesn’t mean that this is a good price in size. Traditional stockbrokers will have lines into market makers via their RSP if it is within the NMS (normal market size). But if you intend on dealing larger than this accept the spread will be wider. Also accept that a spread betting broker will see very little business in this market and will want to hedge the trade. So expect to see a line go through on level 2.
Be careful of suspended shares (leverage issues)
Many AIM stocks are subject to constant M&A rumours of takeovers. This is part of the fun and attraction of trading on AIM. As the good AIM stocks are growing companies with expanding client bases and revenue streams. The good thing about this is that you can make big profits if a company you are long of is bid for. The disadvantage is that when a company produces an RNS re bid talks, the shares are normally suspended. What happens then is the margin rate is up from 15% to 100%. As a customer you have to stump up the cash for your entire position. Which can be expensive.
Beware going short on AIM stocks
As will any short position, your profits are limited and you losses are unlimited. The problem with going short AIM stocks is that they are generally much lower priced. If a company trades at 2.3 bid 3p offered, you are short and they are bid for at 30p, you are going to lose a huge amount. So beware!
Liquidity issues for spread betting on AIM stocks
It maybe easy to buy stock but selling may be another matter. Aim stocks traditionally have some very early stage investors looking to get out so you may find plenty of sellers when you are buying stock on the way in. But if you are dealing in size it’ll be difficult to get out.
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Richard started the Good Broker Guide in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.