COMMENT
Aim Grows Up, Part I

By Ed Bowsher (TMFArkle) (TMF Arkle)
November 3, 2005

The Alternative Investment Market (AIM) was originally created by the London Stock Exchange (LSE: LSE) as a nursery for young growing companies in the UK. The idea was that businesses would raise some early cash in a lightly regulated market, and when they matured, they would then move up to the LSE's main market.

However, things haven't gone quite as planned. Yes, AIM has been a success, but it's become so popular that many AIM-listed companies have no desire to move up. Some firms have actually moved down from the main market to AIM.

What's more, AIM now includes some sizeable companies. The biggest is online gaming giant Sportingbet (LSE: SBT) with a £1bn market cap. Other biggies include e-wallet company Neteller (LSE: NLR) which is currently valued at £890m, and £710m oil explorer, First Calgary (LSE: FPL).

So why do companies like being on AIM?

One reason is that regulation is relatively light. If a company wishes to list on the main market, it normally needs to demonstrate a three year trading record and at least 25% of the shares have to be in held public hands. You don't need to worry about either issue if you want to list on AIM.

Another big plus for AIM is that it has a global reputation as a growth market. AIM now has critical mass and companies from around the world are keen to join up.

Big tax breaks for investors have also boosted AIM, and the index has performed pretty well - rising 70% over the last three years.

Be careful though, much of that rise has been due to the increasing popularity of resources stocks. That fashion may change. It's also been a good three years for most smallcap shares, regardless of whether they're listed on AIM or elsewhere.

Still, a 70% gain is not to be sniffed at, so how can Fools gain exposure to the AIM index?

One option is to try and pick the best shares. The problem here is risk. Some AIM shares could be classed as medium risk, but there are also plenty of high-risk outfits on AIM. Some of them could deliver big gains, but there's also a decent chance that something could go wrong, and you could lose most or all of your money.

Alternatively, you could pick a fund that mostly invests in AIM stocks. The Close Beacon OEIC is perhaps the most AIM-focused fund out there, although its recent performance has been no better than reasonable. It's also an actively managed fund, so you would normally have to pay a 5% initial charge to sign up.

Of course, The Motley Fool has always been a big fan of tracker funds which are usually much cheaper. However, I've not been able to find any AIM tracker on the market.

That may change. AIM's management teamed up with FTSE to launch two new AIM indices in May. These are the AIM 100 index which comprises the largest hundred companies on AIM, and the AIM UK 50 index which comprises the fifty largest UK-based AIM-listed companies.

These new indices may inspire a fund management company to launch an AIM tracker. I'll keep my eyes peeled!

In part II this afternoon, I'll examine the tax breaks for investors in AIM-listed shares, and I'll also look at another investment vehicle, AIM venture capital trusts (VCTs).

More: Aim Companies discussion board | Part II