The Alternative Investment Market (AIM) hosts junior companies on the London Stock Exchange. Its main function is to provide a listing before companies grow and migrate to a main listing.
AIM was set up in 1995 to promote investments in 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 stocks and shares ISAs, making them attractive tax-wise.
- Related guide: Compare the best stocks and shares ISA accounts
According to the latest statistics from the FTSE AIM all share index, AIM currently has 765 firms with an overall market capitalisation of £60.5bn (down from £97.6 billion in Mar 2019). So it is definitely a market to look at.
Five things to know about buying AIM stocks:
- It’s not just small companies on AIM. There are 15 stocks with a market capitalisation above £1 billion (Dec 22)
- The next rung down, with a market cap £250-1,000 billion, has 74 companies. Together these firms form the bulk of the FTSE AIM 100 Index, the equivalent of the FTSE 100 Index
- The three biggest sectors (by market cap, end-Mar) are: Financials,, Industrials, and Consumer Services.
- 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 10 AIM stocks by market cap (end-Dec’22) are:
- KEYWORDS STUDIOS PLC: LON:KWS
- HUTCHMED (CHINA) LIMITED: LON:HCM
- JET2 PLC LON:JET2
- BURFORD CAPITAL LIMITED LON:BUR
- CVS GROUP PLC LON:CVSG
- GLOBALDATA PLC LON:DATA
- RWS HOLDINGS PLC LON:RWS
- FEVERTREE DRINKS PLC LON:FEVR
- EMIS GROUP PLC LON:EMIS
- YOUGOV PLC LON:YOU
Many AIM stocks are famous household names, such as ASOS (ASC), Fevertree Drinks (FEVR) and Boohoo (LON:BOO). However, there are some less well-known ones too, such as Blue Prism (PRSM).
How to choose what AIM stocks to buy?
- Decide what Aim stock you want to invest in: 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 buying AIM stocks?
AIM stocks are just like main market shares, albeit smaller. So they retain one key characteristic 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.
These are what we think are some of the best stock brokers for investing in AIM stocks and why:
- Hargreaves Lansdown – excellent market access, research pricing data and AIM company reports
- Interactive Investor – provide a fixed fee investing account and access to the AIM market
- AJ Bell – a low cost investment platform for investing in AIM shares
- IG – investing, CFD trading and financial spread betting on AIM stocks
- Spreadex – a smaller derivatives brokers with great customer service for working orders in between the bid/offer spread (for more advanced larger traders).