AIM Trading Tips
The best place to start before trading AIM is to look at the risks. We have included our AIM risk warning below:
Shares in smaller companies or AIM listed shares can carry a higher degree of risk than blue-chip investments and there is always the possibility of losing the capital sum invested.
Investment should be restricted to the maximum one can afford to lose.
It is more difficult to buy and sell shares in small companies and it may not always be possible to deal.
Market Makers operate with a wide spread between buying and selling prices for small companies and this spread and fluctuation in the share price may mean that you do not get back the full amount invested.
AIM is primarily for emerging or smaller companies and its rules are less demanding than those of the Official List of the London Stock Exchange.
The past is not necessarily a guide to future performance by companies that are less financially secure and therefore the risk of default is substantially higher.
Shares in companies incorporated in emerging markets may be harder to buy and sell than those shares in companies in more developed markets. In addition, companies incorporated in emerging markets may not be subject to an equivalent level of regulation as those in more developed jurisdictions.
Investing in shares in a specialist sector can be a higher risk strategy as the sector concentration gives exposure to higher volatility.
Now let's look at some of the points to see their potential impact and other factors to consider.
AIM is only for small companies.
Small companies are more vulnerable and are less well capitalised than main listed shares. But are all AIM Shares small companies?
The top 10 companies have a combined market cap of over 22 billion however the bottom 10 have a combined market cap of just over 3.85 Million.
Statistics from 08/2019
Impact of wider spreads
If you first look at the spread of one of the largest and most actively traded on the FTSE and then compare with the smallest company on AIM.
Certain shares can be "illiquid" meaning that you can't be sure that you can buy and sell when you want
With growth companies you are going to get it wrong, trade for long enough and you will get a share that goes bust or features in a scandal. The best way to balance this out is with diversification. If you buy ten AIM shares, one goes bust one goes up 300% and the remaining eight balance each other out your portfolio is still up 10%.
Small volumes of business can have a disproportionate effect on price and lead to greater volatility. Also if a small company is spending all its money trying to find a valuable asset say oil or gas and finds nothing it is going to have a big impact when it announces to the market it has come up dry!
AIM regulation is less onerous than the main market. While greater regulatory flexibility makes it easier for smaller companies to list and makes it more cost-effective, it also leads to significantly increased investment risks.
An inefficient market is simply a market in which share prices do not accurately reflect their true value. Within the AIM it could be caused by minimum trading history, under-researched companies due to lack of coverage by analysists or lack of news flow.
All you have to do now, is research the AIM companies to see if they are under or overvalued and then trade the right way.