Investing In AIM Shares – Advantages and Pitfalls

May 23, 2012

The Alternative Investment Market (AIM) is a subsection of the London Stock Exchange that, due to fewer financial regulations, allows for more investment freedom but also more risk if that freedom is used unwisely. Smaller companies often take advantage of the AIM system as they try to spur business growth. Some companies graduate to the regular London Stock Exchange after performing well in the AIM. Timing is everything with AIM investments because the stocks tend to fluctuate more than those in the regular Exchange because of the nature of the companies involved and because of less regulatory supervision. Investing in the AIM should be done carefully because there are a variety of dangers that can counter the potential advantages.

AdvantagesThe unpredictability and fluctuations of AIM investments can work to your advantage because AIM shares sometimes gain value very quickly, resulting in a fast return on investment. If you time your buying and selling properly, you can generate a substantial profit in a short amount of time.One clear advantage of AIM investments is that they are considered “unquoted investments” under tax laws even though they are actually quoted. Private investors can therefore take advantage of the loophole and face less tax liability on AIM profits as a result. This provision is only applicable to shares bought after April 6th, 2000 and does not apply to purchases made prior to that. This allows you to save about five percent in capital gains tax for each year you hold onto your AIM shares.

If you hold onto AIM shares for at least two years, the shares are not considered part of your estate in the event of your death. This means that inheritors do not owe tax on inherited AIM shares over two years old. Some people invest into AIM when preparing a will and estate to gain the benefit of added tax relief. One way of doing this is liquidating material assets and then putting the money into the AIM, though this is risky if the AIM investment loses value.

Holding onto shares for at least three years grants you additional tax-saving options because you can apply for up to 40 percent income tax relief on AIM profits for shares over three years old. Venture capitalist funds sometimes invest in these three-year holdings to reap the benefits of the additional tax savings.

Pitfalls and Risks

AIM shares are typically unstable, meaning they can fluctuate up and down rapidly. While this can lead to profit, it also makes investment more dangerous because the value of your stock can plummet before you have a chance to properly react and it may not recover its initial value. AIM shares are always more of a gamble as a result.

While there are venture capitalist trusts that invest in AIM shares, there is often a lack of demand for the shares after the three years are up. This may result in you having to sell your shares at a loss, eliminating any tax benefit you gleaned previously.

The companies that have shares on the AIM are typically younger or smaller organizations. The lack of track record makes it more challenging to accurately predict how the company will perform in the future. These companies are also often overseas, making oversight more challenging. The lack of regulation means the company has fewer requirements regarding the release of information and it is therefore easier for them to spin an inaccurate portrait of company financial health that fools potential investors until it’s too late.

AIM investments, much like any other investment, should be done in moderation. Diversification in the AIM and in the regular London Exchange helps protect you from loss because the rest of your investments can absorb the loss incurred by a single bad-performing stock. Investing a high percentage of your funds into AIM shares may yield high profit but could just as easily wipe out your finances. Plan carefully and spread out your investments to maximize your potential in AIM stocks.