Three mistakes to avoid when investing on Aim

Investing in Aim shares can produce spectacular returns. But as Michael Taylor of Shifting Shares explains, you have to have your wits about you.

Aim was set up as the Alternative Investment Market in 1995 by the London Stock Exchange, with the aim of allowing small, growing companies to access capital more easily. It started out with ten companies, but since then more than 3,600 have raised cash from investors on Aim. The results have been mixed. At its peak more than 2,000 companies were listed on Aim, but fewer than 900 remain and in 2007 a then-member of the US regulator, the SEC, described it as “a casino”. But growth companies are always higher risk, so this may not be entirely fair. 

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There are a few key differences between Aim and London’s more stringently regulated main market. Companies need not have a trading record and there is no minimum market capitalisation (total shares in issue multiplied by the share price). These two rules mean there are many unproven business models on Aim. Yet amid all the blue-sky visions and dubious schemes, there have been several success stories with solid business models. Diamonds in the rough such as Domino’s Pizza and online fashion dynamo ASOS have delivered staggering returns for shareholders.

Given this wide variation in returns, Aim is not a market for index trackers. It’s a market of stocks, rather than a stockmarket – if you want to make decent returns, you have to be picky. But if you are willing to get your hands dirty and do the work, the rewards can truly be life-changing. Chris Boxall of Aim specialists Fundamental Asset Management notes that a company’s Aim admission document is “essential reading for any prospective investor” and yet it’s one that many ignore. So rather than pile in, be patient and do your research.

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As Boxall points out, “Aim’s biggest winners have nearly always experienced material short-term share price weakness at some point – ASOS... joined Aim in October 2001 at a price of 20p, but by August 2003 the price had slumped to 3p. The share price also fell from £70 in Feb 2014 to £22 by Sept 2014, only to go on and hit a high of £77 in March 2018”. This is the ultimate appeal of Aim: to find tomorrow’s big winner. In this piece, we’ll look at Aim in detail and look at three of the biggest mistakes potential Aim investors make. 

A crash course in Aim investing

One concept matters more than any other when it comes to Aim – “dilution”. Companies that are not yet profitable need cash to fund their operations. In the absence of sustainable cash generation from the business itself, this has to come in the form of cash injections. So to raise cash, new shares are sold to investors in an “equity placing”. This increases the number of shares in issue – hence the term dilution.

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The problem is that the new shares are usually sold for less than the prevailing market price, to attract new investors. Thus a conflict of interest arises between existing shareholders and the new ones: the former want to see the company sell its shares at a higher price to decrease dilution and minimise its need to return to the market at a later date for more (the lower the share price, the less cash the company will receive), whereas the latter are keen to get the best value for money. 

Here’s a simple example of how dilution works. If we own 10,000 shares at £1 each (so a £10,000 stake) in a company worth £100,000, we own 10%. But if the company sells another 100,000 shares, our stake would halve from 10% to 5%. There is also a big difference as to how much our company’s coffers will be boosted if it places those shares with investors at 80p (£80,000 raised) and at 50p (only £50,000). 

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Another risk is that trading in an Aim company’s shares is not suspended when a fundraising is planned. So news of a pending placement can easily leak. In small-cap stocks that are traded on SETSqx (the trading system for less liquid stocks – more on that in a moment), it only takes a few thousand pounds’ worth of stock to move a share price. If an insider finds out about the equity placing plans and tells their friends down the pub or sells out themselves, the price can fall below the placing price – forcing the fund raising to be renegotiated for the worse, or even be cancelled. This issue is compounded by the fact that some brokers do not keep clear insider lists – and that nobody has been charged for insider trading within the last five years. 

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