Trade AIM Shares

Do you want something more exciting in your trading? Have you considered trading AIM and small cap shares? These types of equities are the most volatile, and this equates to huge potential profits, but with a large downside risk.

AIM stands for alternative investment market, and that’s just what you get in this area of the financial world. These are the companies that are small and fast growing, and this market is optimistically called a ‘nursery for business’. With light regulation and low fees, many firms that would not qualify for the conventional route have joined this market and investors have been enticed by the prospect of rapid and large gains. Even the term ‘small’ might be tricky as AIM companies range from micro enterprises value at a few million pounds to companies worth a few hundred million. It is worth noting that many AIM companies have operations outside the UK in very diverse locations.

Trading AIM Shares by Christopher Beauchamp of IG Index

The AIM market remains the main focus for many retail traders and investors. The volatility offered by the shares and the potential returns of many of their business plans remain fertile ground for investors who have carried out thorough research. The mere fact that many of these companies are off the radar of the analysts covering the major stocks presents opportunities for those prepared to do their homework. Some of these companies have never made a profit while other have been paying regular dividends for some years. The AIM market is still a bit like the Wild West for stocks and AIM shares can’t be included in ISAs, not unless they are dual listed on another stock exchange anyway. But there are still certain tax advantages for investors putting in money for the long-term.

Against these advantages, you must be careful in selecting which companies to trade if you don’t want to end up losing your shirt. The lack of regulation has attracted many foreign groups who want to raise money and were not qualified for listing in their home countries. There have been some dramatic crashes and questionable quality of some of the firms. And if an enterprise run out of money in the AIM market, it faces problems as banks don’t normally give it credit which could lead to rights issues which further dilutes holdings.

The key to this market is to be careful with your stock picking. The average returns have not been spectacular, mainly for the reason that for every company that makes it big, there are other companies that are dramatic failures. The leverage which permits you to have an exposure to a stock or share by say, placing 25 or 30 % of its value make this a sophisticated and valuable tool but clearly leverage needs to be handled with care.

If you’re prepared to do your homework, certainly there are some gems in the small-cap market. The issues that you need to look at include the difficulty in checking up on many of the companies. Some appoint public relations firms to raise their profile, but others don’t afford themselves that luxury. It’s certainly a different challenge from trading in large blue-chip stocks, where there is an overload of information.

With some small cap companies they can also be the question of liquidity in the market. Whenever you want to buy or sell shares, you rely on liquidity in order to achieve a fair price, and if there is little trading going on you may have to pay over the odds, or when selling accept what you can get. Many investors in small companies have taken an initial position and have no intention of selling. In particular, AIM shares can move rapidly on good or bad news and because of their very limited liquidity sometimes it is difficult to close a trade near to the prevailing market price if the position is held in any significant size. Because of the high risk and lack of liquidity, some spread betting providers may require margins as high as 50% or 75% for certain certain AIM quoted companies.

The third issue with this market is the uncertain prospects that many of these companies have. They are difficult to trade because, generally speaking, investors take positions and are prepared to hang on through wild fluctuations for the potential reward of being in at the start of another large conglomerate. Traders don’t find this a friendly environment. Couple this with the fact that the tax incentives are designed to encourage long-term investing, and short-term trading on the AIM market can be described as challenging.

If trading in bigger sizes or trying to deal in a small cap share with a wide bid-offer spread it can be worth the extra effort to contact your broker’s dealing desk as they may well be able to negotiate a better deal on your behalf. When dealing in AIM stocks it is also good practice to always ask for a price and size without stating whether you are a buyer or seller. Note that I don’t personally recommend relying too much on technical analysis for smaller (particularly AIM) companies during a bear market and even in a bull market TA can throw you, with minnows.

The traditional approach of investing is to learn about a company, check the accounts, assess the management and think through the potential market, and then get into it for the long term if all looks acceptable. But today it seems the greatest force in the AIM market is sentiment and herd instinct in the short term so you really need to be ready to wait-it-out. Sadly AIM is high risk and especially in a bear market and if the FTSE were to hit 4000ish within 18 months, you can only imagine how that will affect some AIM firms let alone the larger ones.

Trading AIM Shares: Company Analysis and Examples

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With spread betting on AIM shares there are two things that should be avoided, entering stops and running out of margin so that you are forced to close out. Spread betting companies encourage stops as you can take more or bigger bets using the same capital but that is precisely the behavior that loses money for the punter. In fact buying stops in these situations just encourages buying high and selling low. I’ve become quite good at buying low but still have difficulty in selling high 😉

The problem is that it is not only the majority of personal investors who treat investing more like tombola, but also much of the popular financial press encourages this attitude. Having said that, if you’re up to the challenge and prepared to do your research, there is no doubt that these companies represent the most dramatically swinging values, which to the trader means potential profit. High potential returns are usually found with high risk prospects, and AIM shares comply with this concept.

>> Trading FTSE Small Cap Shares

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