Investing in AIM companies: how to avoid the bear traps

Investing in AIM companies can offer high returns and potentially attractive tax benefits. However, compared with other mainstream exchanges there are considerable additional risks, and investors should tread carefully.

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results
Diagram showing how to invest in AIM companies

The advantages of AIM investments

Some of the best returns in recent years have been made by investors in the Alternative Investment Market (AIM) stocks. A combination of early stage and potentially high growth business models, accompanied with attractive tax breaks (such as exemption from Inheritance Tax in some cases) make AIM an area where fortunes can be made, as well as lost. 

While AIM has traditionally been perceived as the UK’s wild west of investing, some large and well known players have emerged amongst the 800 or so businesses listed on the market. ASOS, Fevertree Drinks, Majestic Wine and boohoo.com are among those that have made it onto the radar of most investors.

AIM 100 companies vs FTSE 100 companies

  FTSE 100 AIM 100

Average analyst recommendations

21 3

Average Bid-Ask Spread %

0.07% 1.96%

Pays a dividend

96 of 100 73 of 100

Median market cap (£)

8.98 billion 0.34 billion 

 

AIM typically attracts younger companies, many with unproven business models, which seek equity funding to grow their operations. Accordingly, high numbers of these businesses are loss making (more than half of those listed). Many have not yet started trading, while they perform research and development, or in the commodities space, carry out test drilling and exploration.  

AIM has also had its fair share of scandals too, with a number of accounting frauds (largely from overseas-based businesses that list on AIM) leaving investors with burnt fingers.

With this in mind, we outline our top tips below.

Five tips for investing in AIM companies

1. Do your own research into the AIM stock market

Looking at the constituents of the AIM 100, they average just three analyst recommendations. By comparison, the average FTSE 100 stock has 21 analysts following it.

Of those three recommendations, one will be from the house broker (thus unlikely to be completely objective), and a cynic would argue that the other two may well be more interested in winning corporate business than in informing investors.

Through reading the annual reports, and finding out as much as you can about the company and its services, you could get a genuine edge on the rest of the market.

2. Don't trade AIM shares too often

AIM 100 companies have an average bid-ask spread of 1.96%, whilst the smaller cap businesses listed on the rest of the market have an average bid-ask spread of 6.3%. To put this in context, long-term returns from UK equities average around 7% a year.

Trading frequently in most AIM-listed stocks will destroy your long-term returns.

3. Diversify your AIM investments

Many companies on AIM have very modest daily volumes, which is to some extent reflected in the bid-ask spread. Being a forced seller in an illiquid stock can be very unpleasant.

In thinly traded stocks there may only be one or two brokers that make a market in the company, and when there are no buyers and lots of sellers, dealing spreads can balloon and share prices can gap down by an alarming amount. Investors should ensure that they have a diversified portfolio.

Recall that over half of AIM-listed companies are loss making. Many of those businesses will go on to fail and see their market caps dwindle to nothing. 
 

4. Take internet bulletin board advice with a pinch of salt

AIM-listed stocks tend to be partial to scurrilous rumours from anonymous online posters. Spreading misleading information to induce others to invest (‘pumping and dumping’) is illegal, but it still happens. If someone has a ‘hot tip’ that has not been released to the market, there’s a good chance it isn’t true. 
 

5. Not all AIM companies qualify for tax advantages

Some companies will qualify for business property relief (BPR), which can make them 100% inheritance tax free if held for more than two years. But not all listings do, and some only part-qualify. Always get professional advice if investing for this reason.

What are the tax benefits of investing in AIM companies?

The saying 'don’t let the tax tail wag the investment dog' has never been truer than with AIM stocks. There are certainly attractions to investing on AIM, but a bad investment will still be a bad investment no matter the tax reliefs available. We advise investors to look at the investment merits of a business first, and the tax advantages second.

Any investor looking to take advantage of the tax reliefs available from AIM should do their own research or speak to an advisor, as not all AIM companies qualify for them.

Below we list a summary of the reliefs and tax advantages that regular investors in AIM stocks could make use of:  

1. Inheritance tax (IHT) relief

Business Property Relief (BRP), up to 100%.
 

2. Venture Capital Trusts (VCTs)

Investment limit of £200,000 a year with up to 30% initial income tax relief (if held for 5 years) and exemptions from CGT and tax on dividends.
 

3. Enterprise Investment Scheme (EIS)

Available for investors that subscribe to new shares in AIM companies which qualify as trading companies. £1m annual cap and 30% initial income tax relief. Exemption from CGT on disposal and loss relief up to 45% if sold at a loss.
 

4. Exemption from Stamp Duty

Zero stamp duty on purchases, saving the 0.5% tax which would be payable on the main listing of the London Stock Exchange.
 

5. Capital gains tax (CGT) gift relief

The CGT liability can be postponed until the receiver sells the stock. 

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This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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