How to invest in the AIM from the US

Most people with funds to invest will have heard of the LSE – the London Stock Exchange – the UK’s main share market with around 2,500 listed securities. Far fewer will know about the AIM – the Alternative Investment Market – which is a sub-market of the LSE.

The AIM, formed in 1995, is designed to help smaller companies access capital from the public market rather than private sources, by listing on an exchange with fewer restrictive rules than the main LSE listing. Each company must have a nominated advisor (commonly known as a NOMAD), a corporate finance or accountancy firm which provides it with assistance both at the IPO stage and with continuing regulatory compliance.

Smaller and possibly riskier companies

As a result of the more relaxed listing rules, AIM-listed companies tend to be not only smaller but can also be more volatile, and therefore riskier. AIM investors, on the whole, are more experienced and knowledgeable investors with a high appetite for risk, or institutional investors who have the resources to perform meticulous due diligence.

Investing in companies which are considered risky and speculative could see you losing all of your invested funds, although there is always the potential for capital gains if you hit on the right company by luck, gut feeling or market knowledge.

This guide is definitely not a recommendation to invest in the AIM, but its intention is to explain the options, procedure, and pros and cons if you do decide to go down this investment route.

Just like its parent, the LSE, the AIM has market indices which reflect the price movements of some or all of the listed shares. These include the FTSE AIM All-Share Index, the FTSE AIM 100 Index (100 largest companies by market capitalization), and the FTSE AIM UK 50 Index (50 largest UK companies by market capitalization). However, unlike the situation with the FTSE LSE market indices, there are no index funds trying to exactly mirror the performance of any of the AIM indices.

This leaves investors with the remaining two standard investment methods – ETFs and individual company shares – although anyone with a huge appetite for risk (and possible significant losses) could consider investing in CFDs (Contracts for Difference).

Exchange Traded Funds (ETFs)

ETFs pool the cash of investors who have bought units in the fund in order to purchase a diversified basket of securities, such as company shares and fixed interest bonds. Individual ETFs usually aim to track a particular market index, industry, commodity or investment strategy. ETFs are listed on a stock exchange, and you can buy and sell ETF units in the same way that you trade shares.

It’s already been established that there are no AIM index-tracking ETFs. But there is an ETF which is likely to have holdings in AIM-listed shares, even though the fund itself is listed on the LSE:

• iShares MSCI UK Small Cap UCITS ETF (LON: CUKS)

ETFs, because they have diversified stock holdings, are usually considered to be less risky than investing in individual company shares. But an ETF specializing in small capitalization companies may have a greater potential for both capital growth and capital losses than an ETF investing in larger, more established companies.

Individual company shares

An alternative AIM investment method is to select one or several AIM-listed companies and buy shares in them directly. Be aware, though, that there’s an increased risk in investing in individual companies: all your eggs are in one basket.

If you do decide that you have sufficient appetite for risk and that this investment route is the right one for you, here are some of the larger AIM companies whose shares you could consider trading in:

• Horizonte Minerals PLC (AIM: HZM)
• Abcam PLC (AIM: ABC)
• Jet2 PLC (AIM: JET2)
• ITM Power PLC (AIM: ITM)

Contracts for Difference (CFDs)

This is a truly speculative form of investment which should not be used by share trading novices or anyone who is not prepared to risk a significant portion of their investment value – or even all of it – against the chance of a short-term gain.

When you trade a CFD you do not take ownership of shares, but merely agree to exchange the difference in the price of the shares occurring between the start date and the end date of the CFD. If the share price goes up, you receive a profit. If the share price goes down, you pay for the loss. CFDs are only mentioned here because the AIM is already a speculative market. Trading in AIM CFDs is even more speculative.

Step 1: Choose a broker

There are hundreds of online share trading platforms to choose from. When comparing options, check their brokerage, cash withdrawal and inactivity fee amounts, as well as the tradable securities offered (which should include ETFs and shares).

Whichever broker you choose must have access to the AIM. For the sake of having all your investment activity in one place, you may also want access to US and European share markets from the same broker.

Some brokers offer commission-free trades on ETFs. If you’ve decided to invest in shares, look for a broker offering fractional shares, since some AIM companies have astronomical prices for a single share – upwards of £1,000 and higher.

Step 2: Decide how much to invest

Only ever invest what you can afford to lose because share markets are volatile. If you can’t withstand losses in the short term, it’s best to wait until you can, or plan to invest for the long term only.

Step 3: Transfer funds to your account

Add funds to your trading account with a bank transfer, the most commonly accepted method.

It may take some time for funds to clear before you can start trading. Note that your broker may require a minimum deposit amount.

Step 4: Choose between shares and an ETF (or a combination of them)

ETFs are diversified across a range of companies, so they typically experience lower price volatility than individual company shares and can be better for long-term investment.

Short-term investors hoping for quick capital gains (but also prepared for losses) may prefer to buy shares. ETFs can often be traded commission-free.

Step 5: Configure your order

Depending on the broker you use, you can choose from many different kinds of order.

A market price order is the most straightforward, requiring virtually no setup. Once executed, you’ll get shares at the next available market price for the share or fund unit.

If you have a specific strategy in mind, you’ll need more options in terms of order configuration. Some brokers have highly customizable orders that can be triggered by events, meaning you can buy or sell when your chosen share or fund hits a price target.

Step 6: Place your order

When you’re happy with all of your decisions, submit your order to be executed.

Step 7: Monitor your investment

Share investment should not be a set-and-forget activity. Even if you intend to invest for the long term, you need to keep an eye on the company or fund's performance and price movements. This is especially important in a more volatile market like the AIM.