AIM gets a lot of bad press — only some of which is justified. As online retailers, ASOS and Boohoo.Com and tonic water specialist Fevertree have shown, it’s certainly possible for great businesses to grow and thrive outside of the main market, while also generating substantial wealth for their shareholders.
Aside from standard rules, like being diversified and avoiding companies with high levels of debt, here are a few more suggestions for how investors can improve their stock-picking prowess on the junior market.
Caution – bulletin boards ahead
Many private investors enjoy reading and contributing to bulletin boards or discussion forums on their favourite shares. Some of the most popular boards relate to specific AIM shares and attract hundreds of posts every day.
Unfortunately, bulletin boards also attract those keen to manipulate the behaviour of less experienced investors for their own gain by, for example, posting overly optimistic comments designed to encourage the latter to buy shares in a specific, probably high risk company. Having successfully raised the price, these individuals will then sell up and move on, potentially leaving those still holding the shares with large losses.
As in life, if something sounds too good to be true, it probably is. If a post isn’t based on any available information, then its content is highly speculative, possibly illegal (if the person knows something the market doesn’t), or just plain wrong.
Even if the information is valuable, be aware that the contributor may have completely different financial goals, attitude to risk and a longer/shorter investing horizon. You wouldn’t take financial advice from someone in the street, so why base an investment decision purely on a bulletin board post? Trust in your own research.
Check out management
Few investors would question the assertion that having a competent management team is vital for any company to flourish. This is arguably even more important on AIM, given that many of those listed are at an early stage of development. For this reason, part of any prospective investor’s research should involve scrutinising the track records of those in charge. Do they have a record of success in this industry and have they shown an ability to grow a company while remaining financially disciplined?
Another useful way of judging how much a CEO cares about the company they lead is to ascertain just how much of it they own. Those with substantial ‘skin in the game’ are more likely to take decisions in the interests of shareholders because, ultimately, their own capital is at risk.
Watch the spread
Another thing to watch out for when buying shares in AIM-listed companies is the spread — the difference between the bid and offer prices. Typically, this difference will be a lot greater compared to shares on the main market. The wider the spread, the more money you’re losing by simply buying stock in that business. If the spread is 15%, you’ll need the shares to rise by the same amount just to break even.
Wide spreads can indicate that shares are tightly-held. However, they can also indicate companies with questionable prospects and poor liquidity. In the event of an economic shock, it can be very hard to jettison such stocks from your portfolio. For this reason, holding a large number of highly illiquid AIM shares isn’t recommended, whatever their prospects.
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Paul Summers owns shares in boohoo.com. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.