Do you want to find the next great UK listed company? You have to check out the AIM index.
The AIM (Alternative Investments Market) index is full of young, small and growing companies and is home to famous brands such as Boohoo and ASOS that have seen tremendous growth over the past decade. The index has outperformed its big brother, the FTSE 250 index by 35% over the last 5 years .
However there are some downsides too. In this article we lay out the top pros and cons for you as well as giving our recommendation on how best to get exposure to the AIM index as a Muslim.
1. High reward
As the AIM index is home to young companies still in their growth stage, there is a larger potential upside in comparison to the more mature and established companies in the FTSE index.
Clean energy companies Ceres Power and ITM Power are great examples of the vast potential of AIM. In 2020, they were perfectly positioned to capitalise on the demand for clean energy, seeing their shares rise 314% and 523% respectively.
2. Tax incentives
An added bonus is that purchases of AIM shares are free from stamp duty and some AIM companies are also inheritance tax free if held for more than 2 years which is a big win . There are also various other potential tax benefits available such as income tax and capital gains tax reliefs for certain qualifying investments which you can read more about here.
3. A more level playing field
As discussed in our recent article (You Can’t Beat the Pros at Stocks – Apart from One Place), there is typically less information available to the professionals here. The professionals tend to rely a lot on data and extensive analyst coverage, which is not as forthcoming in the AIM index.
Therefore this is an opportunity for the ordinary investor to carve out a competitive advantage by honing their focus and becoming an expert in a niche area.
1. High risk
Where there is potential for great rewards, this often comes hand in hand with greater risk. As many of the companies in the AIM index are up and coming and still in their growth stage, there is always the risk that the business is unable to deliver as expected which can materially impact the stock price.
There was research conducted back in 2015 that showed nearly 10% of companies listed on AIM had seen their share price plummet by 90% . This risk is something that you need to be mindful of.
2. More illiquid
Companies on the AIM index usually have fewer outstanding shares available to be traded. This lack of liquidity can make it hard to buy and more importantly sell at the price you want to.
If your investment is going south and you want to bail, this can be challenging to do when there is not enough liquidity. Increased illiquidity also increases your exposure to higher spreads (the difference between the buying and selling price) on the share price.
3. Occurrence of fraud
The AIM index has been plagued by scandals since its inception with many instances of documented fraud. This isn’t helped by the lax entry requirements, where new entrants do not need a prior trading record or a minimum market capitalisation.
High profile scandals include cake maker Patisserie Valerie whose shares were suspended from trading in 2018 after discovery of potential fraudulent accounting irregularities. The company eventually collapsed into administration. This example illustrates how investing in AIM companies is not for the faint-hearted and why doing your due diligence is crucial.
The best way to get exposure
Now that we’ve discussed the pros and cons, if you decide that you do want to invest in the AIM market, then our recommendation is to invest in the aim index via a basket of stocks chosen by fund managers whose profession it is to analyse AIM stocks.
The only problem is – none of the AIM funds are Sharia-compliant.
That’s where the IFG Fund Replicator comes in. We’ve taken the top 5 AIM funds and their holdings, filtered out all the haram companies and – voila – you’re left with a clean list of 200+ stocks you can choose from, including our own top picks as well. Check it out here.
- Yahoo Finance
- IFG: You Can’t Beat the Pros at Stocks – Apart From One Place