You’ve decided to invest but now you need to know where to put your money. You’ll also need to learn about the specific risks and rewards that come with that decision.
You’ve heard the terms “FTSE” and “AIM” bandied about but aren’t too sure about what they are.
In this article we explain these terms and give you some background on the broad stock groupings available in the UK – we then make our case for why we think investing in the AIM index is often underrated and can result in some real investment gems.
Public vs Private
First off you want to decide whether you’re putting money in a publicly listed stock or into a private company.
A private company is one that is owned by its founders, management, or a group of private investors and its shares aren’t listed on a stock exchange (like the London stock exchange) for retail investors to purchase. So you can’t buy and sell those shares through your broker.
A public company on the other hand has offered its shares for purchase through an Initial public offering (IPO). Its shares are listed on a stock exchange.
You can buy and sell the shares of a public company through your broker.
Public companies have more stringent rules on the statements and reports they file and they are answerable to shareholders. But they get to raise money by selling their shares to the public.
Types of public stocks
Companies differ in their size, markets, and growth. A privately held start-up is different to a private behemoth that has been around for decades.
In the UK there are different indices for public companies ranging from the very small to the very large.
Starting on the smaller end of the spectrum, the AIM (Alternative Investment Market) index comprises up and coming smaller companies.
The AIM index comprises 850 companies today with a combined market cap of £104b.
On the other end of the spectrum the FTSE 100 comprises the 100 largest companies listed in the UK. The total market cap rests at £1.5 trillion. That’s more than ten times bigger than the AIM index.
Then we have the FTSE 250 which is made up of the next largest 250 companies that lie in between AIM and FTSE 100. More midcap in nature, the total market cap is £323.8b.
What’s special about AIM?
The AIM index hosts smaller companies which have relatively less capital thrown at them compared to companies in the FTSE 100. This results in a more level playing field for retail investors.
1. Retail investor advantage
Since there’s less data available and professional analysts focus less on these smaller companies, you have a greater chance of becoming an ‘expert’ in niches in the AIM index as opposed to the FTSE 100.
2. Growth returns
In addition to that, companies in the AIM are more likely to be in a growth phase as opposed to mature companies in the FTSE 100, which means with sufficient research and prudence, you can probably earn higher returns.
3. Tax benefits
Competitive advantage and high returns aren’t the only benefits. AIM shares come with certain tax reliefs and benefits which its older brothers in the FTSE 100 and 250 (called the FTSE 350 when combined) don’t benefit from.
Why choose FTSE over AIM?
1. Less risk
Since the FTSE 350 holds more mature companies that can weather storms better, they are less volatile and there’s less risk of the company going bust.
Especially in times of hardship, if you had to choose you’d find more security parking your money in the FTSE 100.
This is expected of course, with companies in the AIM index being in their growth phase and less likely to have access to large sums of money in times of hardship.
As I mentioned, the FTSE 350 will give you more peace of mind if security is what you are after.
But there’s another way that FTSE 350 is more secure: these larger companies are subject to stricter rules and regulations.
The AIM index is more flexible in its regulation and so should be approached with more sophistication than if you were investing in the larger companies. There have been some fraud cases in the past.
Since there’s less money in the AIM market overall, there are fewer exchanges taking place and the market is just more illiquid.
This would be an obstacle especially if you don’t hold your positions long and want to make a quick exit, on top of being subject to higher spreads.
The FTSE 350 doesn’t suffer from this problem, with so much capital funnelled into these larger companies there is usually always someone that will pay very close to your ask price as soon as you want to sell.
Why choose AIM over FTSE?
1. Higher returns
In the months after the crash in 2020, the AIM index performed almost three times as well as the FTSE 350.
If you approach the AIM with a level of sophistication and research, your chances of achieving more stellar returns are higher simply because there’s more room for growth in these smaller companies.
Being in the mature and predictable phase of their lives, the larger FTSE 100 companies have already squeezed everything they can out of their market.
2. The Zulu Principle
We’ve mentioned The Zulu Principle before.
By becoming an expert in one niche area of the market you can gain a competitive advantage compared to others. You combine this with the lack of analysis and data in the AIM, and you can really become an expert and go toe to toe with professionals.
This would simply not be possible with the larger companies in the FTSE 350 as institutions scour and process every piece of data with armies of quants and algorithms.
While tax relief should never be the sole reason to choose a specific company to invest in, it’s always the cherry on the cake.
As I mentioned above, there are a slew of tax benefits on offer, such as the EIS scheme which you can take advantage of.
Tax benefits can add up and result in massive savings and gains.
How to invest in FTSE?
Shares in these larger companies should be available through almost every broker.
Of course, not all of them are Sharia-compliant.
Our handy halal investments page curates the most reputable funds for your peace of mind.
How to invest in AIM?
I would be doing you a disservice if I didn’t mention the new and unique IFG fund replicator.
The fund replicator allows you to mimic what the top performing fund managers are investing in.
Best of all, it screens all those UK small cap stocks for Sharia-compliance, ensuring not only performance, but halal performance. So it’s a very nice way to gain exposure to the AIM index for Muslims for the first time ever!