A: AIM stands for the Alternative Investment Market, an exchange regulated market also run by the London Stock Exchange. AIM allows growing companies access to finance with fewer restrictions in terms of companies' trading history, financial track record and liquidity of the shares. Note that companies trading on AIM are likely to be highly volatile with big gaps (even up to 10% or more) in the bid-offer spreads. However, the big risk with trading small cap stocks is that if the liquidity dries up it can become really expensive to trade (as was the case with most AIM-listed shares in the first quarter of 2009). Note that the spread tends to be narrower for AIM stocks that have more market makers dealing in them. If trading in bigger sizes or trying to deal in a stock with a wide bid-offer spread it is usually worth the effort to phone your broker's dealing desk as they might be able to negotiate a better deal on your behalf.
 |
|
 |
|
So what are the differences between AIM and the main market for the companies?
The main marketPrevious analysis of mistakes has shown me that low cap stocks like one often finds on the Alternative Investment Market are very difficult to get right. So I now tend to stay away from them and if I am tempted I only commit a small amount of capital, an amount that I can lose and not worry about. Sure this limits my upside, but more importantly it limits my downside.
Note: The AIM market exists to provide a simple, quick and efficient means for companies to raise capital and operate in a lighter regulated market than would be possible with a full listing. The investor in an AIM listed company is always making a trade off between the risks of investing in a lighter regulated market and the potential for substantial gains due to the valuation anomalies that exist in companies that have minimal (if any) research coverage. The reality is that AIM's a bit of a casino, and research can only take you so far in eliminating the risk.
Recently, I've been reading a paper looking at the failure rate of AIM listed stocks. It's a bit confusing because it includes takeovers as a reason for failure in some cases, but if you break this out it finds that 32% of AIM listed stocks fail within 5 years for negative reasons (i.e. not due to mergers or acquisition), that this varies little across industry and that stocks issued during 'hot markets' have a lower survival rate. They also show that survival rates increase with increasing company age at IPO, increasing market cap at IPO, increasing % of stock listed at IPO and the reputation of the NOMAD.
A: Most spread firms will let you take out shorts on the biggest AIM stocks - mainly the top 50. They will all only take bets over the phone rather than on the net though!
Finspreads quotes spread bets on UK stocks down to a market cap of £50 million although it will go lower if there is sufficient demand. Be warned however that illiquid stocks are prone to wild jumps and although stop losses are available to limit the risks, the prices on really small stocks could easily get past these.
A: Yes, a share automatically goes to auction for 5 minutes if it has moved by more than 10% (I think) - the idea is to stabilize the price a bit. It then comes out of auction and would go back in on any other big moves. It happened a lot with the banks this year as they were so volatile. Small cap stocks all go into automatic auction for 5 minutes at 11am and 3pm.
A: Yes, IG Index will quote any penny share or AIM stock with a minimum market capitalisation of over £10 million although other providers may not offer prices on stocks with market caps of less than £50 million or £100 million. Of course, the smaller the company the less liquid the shares, so you may have to put up a margin percentage equivalent to 25% to 50% for such stocks.
In practice it is hard to trade small caps short-term since the market maker spreads on penny stocks tend to be quite wide and ideally you would want to trade inside the spread and also because of the potential spikes in price caused by wide variations in liquidity. With spread betting the spread is even wider with no possibility to trade inside the spread (since providers take the market maker quote and add a bit to the bid-offer market maker spread). Thus, since trading in small companies is difficult because of the wider spreads, in such cases you would do well to aim to trade medium term moves lasting a number of weeks as opposed to days.
A good idea is to calculate the spread of the instrument you wish to bet on as a percentage of the price. For instance I'm looking at GVC.L which is a relatively small stock with a valuation of some 70 million. The underlying market currently has a spread of 223-226 (1.33%) while the price I was quoted by my spread betting provider was 222.6-226.4 (1.68%). If one compares this to a stock like BP which is in the FTSE 100, the underlying market spread for BP is presently 0.04% while the spread betting provider's quote is 0.2% of price. The point here is that smaller caps come heavier in commission terms so it is harder to make money trading off them.
Note: You can also trade index options and futures at IG Index but not stock options (but anyway spread betting on a stock is similar to an option).
A: IG Index will sometimes do this if the shares are illiquid. I assume they have a risk limit for PCI and it has now been reached. It seems that once the limit is reached, they are no longer willing to take the risk without actually purchasing real shares which would offset their risk.
A thing which may be of interest is that a lot of the stops on AIM shares are triggered manually by IG staff, so If you have a non-guaranteed stop it may take a while to kick in, as someone has to click a button, and so not get your stop price. Also, some buy orders which are for more than a few thousands of AIM shares also get referred to a person.... so your order on the IG screen asks you to wait (for the person to accept your order manually), even though you did it on the internet. If your stops kicks in at 8:10am you may find the staff member is 'not at work yet' and so the stop fails to trigger... true!!!
A: No, AIM shares will not be allowed in an Individual Savings Account (ISAs)...etc - in fact this is one of the main restrictions with AIM stocks. And I had this confirmed officially.
A: Yes, you're right there - technical analysis works best on frequently traded liquid stocks (especially blue chips) or other instruments that are highly liquid. Most small caps are infrequently traded and thus prone to price gaps. The daily charts are thus likely to look quite jagged and intraday charts may have big blank areas where no stock has exchanged hands. Volatility without volume is like the flip of a coin. In an instant, the price could be up 5% or down 5%. What trend?
So as a general rule technical analysis is easier to implement on more liquid stocks although I would not dismiss it as impossible or useless on less liquid stocks (if there is a large seller in a small cap it could either be the case of a distressed seller or something fundamentally has changed).
A: In my experience, guaranteed stop losses are usually only offered on liquid FTSE 100 stocks rather than small, volatile shares like RPT (as the risk is far larger for the latter). In addition, a guaranteed stop loss comes at an additional cost over and above a "normal" stop loss. Small illiquid stocks can be subject to strange market conditions that may see the market maker moving the bid and offer quite dramatically.
You could consider the guaranteed stop loss to be equivalent to buying a put option at a given price with an (indefinite?) expiry date, which is automatically exercised when "in the money".
A: IG Index has Jarvis plc and Lookers plc...
With a market Cap of only 11m and tiny volume you won't find Waterline with any spreadbetter.
I currently use IG Markets to hold my small cap stuff but I pay dealing commission and LIBOR + 2.5% to hold. However, I do get market spreads.
Of course I also have to pay CGT though ;-(
IG cover all stocks down to £20M (I use them). MF Global (formerly Man financial) do shares down to £10M, though I don't use them.
A: Only if the other listing is a so-called 'recognized' exchange - which several quite popular exchanges are not ;o) Here's a pdf document (opens in new window) with a list of which dual-listed AIM shares do or don't qualify.
Q. I've asked some questions regarding small caps to some of the big guns. Here are their responses:A: Do you offer trading of small cap UK equities? Finspreads - Yes, we do as long as the company has a market capitalization of at least £50 million and is liquid enough for us to trade. MFGlobalSpreads - We cater for UK Small cap equities. We can quote any share that has a market cap of £6m and above. City Index - I am sorry to inform you that we do not trade in Small Cap Stocks. Any UK stocks that do not have a market capitalisation of £50 million or more are not available to trade in with our Spreadbetting product. What would it cost to hold a long position in one of these for say 18 months? Please also suggest which of your products would enable me to do this most cost effectively? i.e. using rolling/futures bets. Finspreads - You could hold a position in the longest term quarter contract which will get rolled over 3 times to total an 18 month trade. The only charges that are incurred is when the position is rolled over these 3 times, whereby you pay a reduced spread on the newly rolled position, which for FWY would be minimal. MFGlobalSpreads - I recommend you trade the daily rolling cash share oppose to the future contract. The reason being the spread charge is only 0.2% going in and 0.2% closing out while a future bet the spread charge is 1% in and another 1% to close out. Also the margin on a daily rolling cash trade is half that of a future bet. In this case 12.5% on Fayrewood rolling and 30% on the qtly future bet. What are your margin requirements on Small Cap stocks? If you could send me a list with all tradeable stocks that would be useful. Finspreads - Unfortunately we cannot send you a list of each individual margin requirement as this would be a list of literally thousands. However, we can state that for FTSE 100, margins are usually between 5%-10%, FTSE 250 5%-50% and FTSE ex 350 20%-100%. For FWY, margin is 25%. MFGlobalSpreads - The margin on small caps varies on market cap this can vary between 10% and up to as much as 60% How do you hedge the underlying clients' position in the market? Finspreads - If you buy a spread with us, we will go into the market and buy the stock, thereby hedging your position so that all we make is the spread. MFGlobalSpreads - We hedge our shares in the cfd market. |
Hope that answers some of your questions but feel free to send me queries, comments or concerns at traderATfinancial-spread-betting.com or by filling in the form below :-)
Page is: 103Please do not copy/paste this content without permission. If you want to use any of it on your website contact us via email at 
traderATfinancial-spread-betting.com (remove the AT and substitute by @).
