But four years on, AIM is proving its worth, with a largely scandal- free record and, over the past six months at least, a healthily rising market index. Yet the nature of the market means its constituents still tend to be ignored by many investors.
Peter Ashworth, of stockbrokers Teather & Greenwood, one of the most active broking houses in this market, says: "Performance has been very impressive recently. After a very disappointing period, it has recaptured a lot of the ground it lost. The AIM index was down to 770 odd last autumn: now it is almost up to 1100."
The recent rally has not come a moment to soon. Bill Brown, manager of The AIM Trust, an investment trust specialising in AIM stocks run by Friends' Ivory & Sime, says: "People should bear in mind that AIM had a lot of bad press since it started but in the last six months it has started to perform very well."
Azhic Basirov, of Smith & Williamson, says: "The number of companies on AIM has been fairly static at around 300 to 310. The key thing is that AIM companies have graduated to the main market and investors should remember those companies."
Bill Brown adds: "About 400 companies have been through AIM. Since the market is four years old, and exists to enable companies to raise capital, it should come as no surprise that only now these companies are beginning to fulfil their promises. We see it as a very exciting market with a lot of companies starting to deliver on the plans they put in place two or three years ago."
Peter Ashworth says: "Fifty companies have moved to the full list and that will continue to happen as AIM fulfils its function as a junior stock market. When BATM moves to the main market, it will almost certainly go into the 250, the first time this will have happened and it's an indication of the maturity of the AIM market."
The point about maturity is important given the nature of the market. Bill Brown says: "My view on AIM is that it is venture capital with a quote - venture capital in the sense that companies are trying to raise finance, but the investor has the reassurance of holding quoted shares. It is most suitable for entrepreneurial businesses that want to raise capital to grow and that capital is being raised in the most suitable form - ordinary shares".
Peter Ashworth says: "The AIM Trust has had a significant effect, helping to focus attention on the AIM market. The best-performing smaller companies' funds during the recent rally have been the AIM Trust and Beacon Trust."
Bill Brown says these funds are the best way for private investors to get exposure to AIM stocks, partly because they can be put into an ISA (which directly-held AIM stocks cannot) but also because of the risks involved in picking individual shares. "Yes, you are going to get your fingers burned from time to time, but you will also have the opportunity to grow your money seven, eight or nine times or more."
Peter Ashworth thinks many private investors seem unconcerned by the risks. "Individual investors are far keener than institutions to invest in AIM because they are less put off by the risk/reward ratio. The universe of investors is still small, although there are funds like Beacon and AIM Trusts and VCTs (Venture Capital Trusts) that haven't invested all their cash yet."
Another criticism often levelled at AIM is oversupply of certain types of company, notably technology stocks. Bill Brown says: "There is a broad range of companies. Our portfolio has, software, oils, biotech, a brewery, retail, publishing, hardware and leisure stocks, a good spread".
Azhic Basirov says: "Smaller companies are presumed to involve a higher level of risk, but there are many companies on AIM that represent less risk than some on the main market. It is the size of their marketplace, what they are doing and what sort of management they have, rather than the size of the company."
Peter Ashworth feels a healthy supply of equity will continue. "We have been involved in several flotations recently and there are more to come over the next couple of months, with technology companies, wanting to float.
"The other thing that is significant after four years is the number of AIM companies looking for a second or third round of financing. There are companies out there that have done it once and found it works so they are willing to do it again."
Azhic Basirov said: "The rules private investors should follow are the same as those that apply to the wider market: look for companies that have good products, in good growth markets and have good management teams."
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