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Here’s our quick guide to investing in stocks on the AIM market
The Alternative Investment Market (AIM) hosts junior companies in the London Stock Exchange. Its main function is to provide a listing before companies grow big and migrate to the main listing.
AIM was setup in 1995 to promote investments into risky corporate ventures. Because of its less onerous listing requirements, many new startups choose to list there. Liquidity has grown as AIM shares can be included in individual savings accounts, making them attractive tax-wise.
According to the latest statistics (Mar 2019), AIM currently has 904 firms and has a market capitalisation of £97.6 billion. So it is definitely a market to look at.
Five Things to Know About AIM Stocks
- There are 13 stocks with a market capitalisation above £1 billion (Mar-’19)
- The next rung down, with a market cap £250-1,000 billion, has 77 companies. Together these firms form the bulk of the FTSE AIM 100 Index, the equivalent of the FTSE 100 Index
- Three biggest sectors (by market cap, end-Mar) are: Financials (£17.8 bln) , Industrials (£16.3b), and Consumer Services (£13.8b)
- AIM stocks can be very volatile, even the largest. But returns can be very good if timed correctly. Occasionally, you may even grab a ten-bagger!
- The top 7 AIM stocks by market cap (end-Mar) are:
- Burford Capital
- Fevertree Drinks
- Hutchison China Meditech
- Secure Income REIT
Brokers for investing in AIM stocks
You can compare all stockbrokers that offer access to stocks on AIM here or you can read in depth and user reviews of these AIM stock brokers here:
- Hargreaves Lansdown – stock and fund supermarket
- Interactive Investor – lively active investor discussion
- AJ Bell – allround investment services
- IG – investing and trading from one provider
Many AIM stocks are famous household names, such as ASOS (ASC), Fevertree Drinks (FEVR) and Boohoo (Boo). However, there are some less well-known ones too, such as Blue Prism (PRSM).
Investing in AIM Stocks
The first thing one needs to do is to get a list of all AIM stocks currently trading in the market. You can get this information for free from the LSE website (here).
The next step is to filter stocks based on your investing criteria, such as market capitalisation, recent returns, or by sector. Many prefer to start from market capitalisation, that is, picking the top 100 AIM stocks by market capitalisation. Liquidity is good for these larger stocks.
After that, you construct a watchlist. The number of stocks in this list should not exceed 30 as you will struggle to research them properly. Next, find out more about these companies in the watchlist – including their activities, profitability, and peers’ performance. Lastly, you invest only when you feel the stock has satisfied all your conditions.
What is the Risk-Reward for AIM stocks?
AIM stocks are stocks, albeit smaller. So they retained one key characteristics of a stock, namely, volatility. Prices could go up 200% and down 60% over a short period of time. But AIM stocks have one great factor going for them: Growth.
These AIM-listed firms are often young, dynamic, and fast-growing. Take Fevertree Drinks, the leading supplier of premium carbonated mixers. The stock soared 10x over a 4-year period as sales and earnings outperformed.
But once its growth spurt is over, you will have to trade carefully. For example, Asos grew and grew – until investor expectations are set so high that they could not be met satisfactorily. Prices collapsed by 60% in a year. Prices now are no higher than they were back in 2013 (see below).
So when you invest in AIM stocks, you need to emphasise growth rather than value. More importantly, you will need to diversify across sectors and stocks. Junior stocks have always been susceptible to fads and mania – particularly mining and tech – so you need to have a clear exit plan for buying them. The performance gap between AIM winners and losers is very wide. Hold on to your winners for as long as possible to compound your returns. Your losers? Dump them, as quick as possible.
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Jackson has over 15 years experience as a financial analyst. Previously a director of Stockcube Research as head of Investors Intelligence providing market timing advice and research to some of the world largest institutions and hedge funds.
Expertise: Global macroeconomic investment strategy, statistical backtesting, asset allocation, and cross-asset research.
Jackson has a PhD in Finance from Durham University.