Swim with the small fry, but don't get in too deep

The Alternative Investment Market offers the chance to put your money on tiddlers that may become titans. But there are dangers, writes Sam Dunn

While many investors wonder when would be a good time to dip their toes tentatively back into the FTSE 100, the bold have already dived in at the deep end - by putting their money into the Alternative Investment Market (AIM).

While many investors wonder when would be a good time to dip their toes tentatively back into the FTSE 100, the bold have already dived in at the deep end - by putting their money into the Alternative Investment Market (AIM).

Unlike the established blue-chip stocks that comprise the FTSE 100, AIM offers investors a punt on hopes of future riches from a pool of some 700 fledgling companies in the UK and overseas.

AIM is only for investors prepared to accept volatility. Its members hope to grow big enough to qualify for the main London Stock Exchange, where they will catch the eye of mainstream investors. Mining company Aquarius Platinum, for example, was floated on AIM in October 1999 at 50p a share. Just days before it moved to the bigger exchange in July last year, its price had edged above £3.

To this end, AIM - run and regulated by the Stock Exchange and including such household names as Majestic Wine, Domino's Pizza and Coffee Republic - offers investors the possibility of getting in on a success story right at the start.

Glen Pratt, manager of the £59m Newton Growth fund, which invests in AIM, says: "There can be gems out there that haven't yet been recognised by the market. When you buy an AIM member, you are trying to buy tomorrow's mid-cap companies at today's [smaller] prices. It is a good hunting ground."

The potential reward, though, comes at a greater risk because the companies can be unknown quantities with short track records. Their fortunes might also be at the mercy of one or two customers. Colin Jackson, director of independent financial adviser (IFA) Baronworth, says: "If you are thinking of investing in equities, you should put only a small amount in AIM. The golden rule is to invest only what you can afford to lose."

You can buy AIM company shares directly through a stockbroker - with advice or on a cheaper execution-only basis - or reduce risk by investing in a managed fund such as the Isis AIM Growth unit trust or the Close Brothers AIM venture capital trust. Or, to spread your risk further, there are funds like Newton Growth that partly invest in AIM.

The disadvantage of a managed fund is that you don't qualify for the same tax breaks offered to people who invest directly in AIM - an incentive designed to help smaller firms that may otherwise struggle for funding. Thanks to tapering capital gains tax relief, higher-rate earners will pay only 10 per cent on profits from their AIM shares, as long as they hold them for at least two years. There is no inheritance tax liability if shares are owned for this period.

Ben Yearsley, investment manager at IFA Hargreaves Lansdown, says: "It's a useful tool in tax planning, and there's no more expense than buying other shares. It's def- initely a higher form of risk, but firms without debt and paying a dividend will add a bit of spice to a portfolio."

AIM companies range in size from multi-million-pound food suppliers to outfits with barely 12 months' working capital, so there are plenty of opportunities to pick up on developments unnoticed by big City investment firms - as long as you do your homework.

Mr Pratt at Newton says: "AIM firms will be under-researched and so, for investors, it's a case of writing off to companies and asking for reports.

"The companies tend to respond and look after their private investors well because they make up a larger part of their shareholder base."

Not every stockbroker will be able to buy and sell AIM stocks, so you may have to hunt one down; go to the Association of Private Client Investment Managers and Stockbrokers' website (www.apcims. co.uk) for help. But watch out for dealing costs. If you are confident enough to use an execution-only broker, an online account will help keep charges down, with each trade typically costing from £10 upwards. A phone-based broker service, with advice, will cost more.

Bear in mind that there may be difficulties when you try to sell your shares, since AIM's relatively small size means it can take longer to find a buyer.

While AIM offers the prospect of big returns, like other markets it has suffered from a lack of investor confidence over the past three years. At the end of July 2000, its index stood at 1,693.2; last Friday it was at 679.8 - some 60 per cent down. This is not far off the Nasdaq 100's 67 per cent slump during the same period and compares unfavourably with a FTSE All-Share (Equity Income and Equity & Bond Income) fall of 27 per cent.

But the idea is that when the economy picks up, smaller firms will be able to react faster to changing circumstances and their share price will recover quickly.

www.londonstockexchange.com/aim

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

PROMOTED VIDEO
Life and Style
techCould new invention save millions in healthcare bills?
Sport
David Moyes gets soaked
sport Moyes becomes latest manager to take part in the ALS challenge
Voices
A meteor streaks across the sky during the Perseid Meteor Shower at a wind farm near Bogdanci, south of Skopje, Macedonia, in the early hours of 13 August
voicesHagel and Dempsey were pure Hollywood. They only needed Tom Cruise, says Robert Fisk
News
peopleEnglishman managed quintessential Hollywood restaurant Chasen's
Life and Style
food + drinkHarrods launches gourmet food qualification for staff
Arts and Entertainment
Michael Flatley prepares to bid farewell to the West End stage
danceMichael Flatley hits West End for last time alongside Team GB World champion Alice Upcott
Life and Style
Horst P Horst mid-fashion shoot in New York, 1949
fashionFar-reaching retrospective to celebrate Horst P Horst's six decades of creativity
News
Members and supporters of the lesbian, gay, bisexual, transgender (LGBT) community walk with a rainbow flag during a rally in July
i100
Life and Style
Black Ivory Coffee is made using beans plucked from elephants' waste after ingested by the animals
food + drinkFirm says it has created the "rarest" coffee in the world
Arts and Entertainment
Jamie T plays live in 2007 before going on hiatus from 2010
arts + entsSinger-songwriter will perform on the Festival Republic Stage
Life and Style
food + drinkThese simple recipes will have you refreshed within minutes
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    C#.NET Server Side Developer (C#, XML, WCF, Unit Testing,SQL)

    £30000 - £40000 per annum + benefits+bonus+package: Harrington Starr: C#.NET ...

    Junior Database developer (SQL, T-SQL, Excel, SSRS)

    £20000 - £30000 per annum + benefits+bonus+package: Harrington Starr: Junior D...

    Business Analyst - Banking - London - £550 - £650

    £550 - £650 per day: Orgtel: Business Analyst - Traded Credit Risk - Investmen...

    Data Centre Engineer - Linux, Redhat, Solaris, SAN, Puppet

    £55000 per annum: Harrington Starr: A financial software vendor at the forefro...

    Day In a Page

    All this talk of an ‘apocalyptic’ threat is simply childish

    Robert Fisk: All this talk of an ‘apocalyptic’ threat is simply childish

    Chuck Hagel and Martin Dempsey were pure Hollywood. They only needed Tom Cruise
    Mafia Dons: is the Camorra in control of the Granite City?

    Mafia Dons: is the Camorra in control of the Granite City?

    So claims an EU report which points to the Italian Mob’s alleged grip on everything from public works to property
    Emmys look set to overhaul the Oscars as Hollywood’s prize draw

    Emmys look set to overhaul the Oscars as Hollywood’s prize draw

    Once the poor relation, the awards show now has the top stars and boasts the best drama
    What happens to African migrants once they land in Italy during the summer?

    What happens to migrants once they land in Italy?

    Memphis Barker follows their trail through southern Europe
    French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

    French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

    The ugly causeway is being dismantled, an elegant connection erected in its place. So everyone’s happy, right?
    Frank Mugisha: Uganda's most outspoken gay rights activist on changing people's attitudes, coming out, and the threat of being attacked

    Frank Mugisha: 'Coming out was a gradual process '

    Uganda's most outspoken gay rights activist on changing people's attitudes, coming out, and the threat of being attacked
    Radio 1 to hire 'YouTube-famous' vloggers to broadcast online

    Radio 1’s new top ten

    The ‘vloggers’ signed up to find twentysomething audience
    David Abraham: Big ideas for the small screen

    David Abraham: Big ideas for the small screen

    A blistering attack on US influence on British television has lifted the savvy head of Channel 4 out of the shadows
    Florence Knight's perfect picnic: Make the most of summer's last Bank Holiday weekend

    Florence Knight's perfect picnic

    Polpetto's head chef shares her favourite recipes from Iced Earl Grey tea to baked peaches, mascarpone & brown sugar meringues...
    Horst P Horst: The fashion photography genius who inspired Madonna comes to the V&A

    Horst P Horst comes to the V&A

    The London's museum has delved into its archives to stage a far-reaching retrospective celebrating the photographer's six decades of creativity
    Mark Hix recipes: Try our chef's summery soups for a real seasonal refresher

    Mark Hix's summery soups

    Soup isn’t just about comforting broths and steaming hot bowls...
    Tim Sherwood column: 'It started as a three-horse race but turned into the Grand National'

    Tim Sherwood column

    I would have taken the Crystal Palace job if I’d been offered it soon after my interview... but the whole process dragged on so I had to pull out
    Eden Hazard: Young, gifted... not yet perfect

    Eden Hazard: Young, gifted... not yet perfect

    Eden Hazard admits he is still below the level of Ronaldo and Messi but, after a breakthrough season, is ready to thrill Chelsea’s fans
    Tim Howard: I’m an old dog. I don’t get too excited

    Tim Howard: I’m an old dog. I don’t get too excited

    The Everton and US goalkeeper was such a star at the World Cup that the President phoned to congratulate him... not that he knows what the fuss is all about
    Match of the Day at 50: Show reminds us that even the most revered BBC institution may have a finite lifespan – thanks to the opposition

    Tom Peck on Match of the Day at 50

    The show reminds us that even the most revered BBC institution may have a finite lifespan – thanks to the opposition