By Phil Oakley
Investors are suddenly getting very interested in the Alternative Investment Market (Aim) – and with good reason. The government wants to boost smaller British companies by making it easier for them to raise money. So investors are now allowed to hold individual Aim shares in an Isa (Individual Savings Account). This means you can shelter up to £15,240 (in the 2015-16 tax year) in these investments from income and capital-gains tax.
What's more, the 0.5% stamp duty due on share purchases has been abolished on Aim shares, reducing the cost of investing. Many Aim stocks also stop being liable for inheritance tax once they have been held for two years.
Not all of these tax breaks are entirely new. While you've never been able to hold individual Aim shares in an Isa before, you have been able to hold them in self-invested personal pensions (Sipps), and micro-cap funds that focus on Aim have been allowed in Isas too. More adventurous investors have also been able to get generous tax breaks by owning Aim stocks as part of a venture capital trust. All these avenues are still available.
If you've never owned an Aim tiddler before, should you do so now?
There's no denying that very small companies have the potential to make you very rich. Since Aim was founded in 1995, more than 3,000 companies have listed there, including notable successes, such as internet clothing dynamo Asos, luxury-bag designer Mulberry, and takeaway group Domino's Pizza.
These opportunities exist because very small companies tend to be ignored by the big City stockbrokers as they are simply not large enough to generate profitable trading commissions. So if you are prepared to do your own research, you can discover gems before the masses do, with huge rewards.
But there have been lots of losers on Aim too. A glance through the companies that currently make up the FTSE Aim All-Share index shows the contrasting fortunes on offer. And if you look at Aim as a whole, it's been a pretty miserable place to invest in.
The market boomed between 2003 and 2007, but sank like a stone with the financial crisis in 2008. It takes a lot of skill and undoubtedly some luck to unearth the riches on Aim – and if you're not prepared to accept that, you'd almost certainly be better off steering clear.
What makes Aim so risky?
There are several big differences between the small companies that trade on this market and the bigger, more established ones that trade on the main London market. For a start, Aim stocks have no minimum market value, compared with a minimum of £700,000 on the main market. So companies can be absolutely tiny.
There is also no minimum for the proportion of shares that must be in public hands (the 'free float') on Aim, whereas companies on the main market must have a free float of at least 25%. To list on the main market, you have to have at least three years' worth of audited financial results – there is no such obligation for Aim companies.
Also, the admission documents for Aim stocks are not vetted by the exchange or the UK Listing Authority. In short, investing in Aim stocks is very much a case of 'buyer beware'. There is much less peace of mind compared with investing in the more mature companies on the main markets.
There are a few things you need to be aware of when trading too. Probably the biggest issue is liquidity – ease of buying and selling. Because brokers struggle to trade enough shares to make money, there tends to be a big gap between the buying and the selling price of Aim shares (the 'bid-offer spread'). Don't be surprised to see your shareholding decrease by 15% immediately after you've bought a share.
It can also be worth comparing spreads between brokers. Also, when you want to sell a FTSE 100 stock, you can usually do it easily. Try selling an Aim stock after a profits warning and you may find yourself taking enormous losses just to get someone to take your shares from you.
So while tax breaks offered by Isas are welcome, investing in individual Aim stocks is not for the nervous. If you are not a confident stock picker, buying a micro-cap fund (such as Giles Hargreave's Marlborough UK Micro-Cap Growth) might be your best route to owning Aim stocks.
Shares that might be worth a punt
I've chosen two companies in the drinks business. Majestic Wine (Aim: MJW) is an established and profitable wine seller with good growth prospects. It stands out from the competition by offering a range of quality wines combined with excellent customer service. The shares aren't cheap, but offer reasonable value, with a growing dividend.
Shares on the ISDX Growth Market (formerly Plus Markets) are also now eligible for Isas. For a less high-profile drinks business, look at Chapel Down (LSE: CDGP). This leading maker of English sparkling wine has a niche brewing business on the side. It has a market value of only £10m, but both businesses are growing nicely. It could be snapped up by a big drinks company if it continues to do well.