What is different about investing in the AIM market?

Investors wishing to buy or sell shares in AIM stocks will deal through a stockbroker in a traditional way. However, whilst dealing in the shares on an execution-only basis may be relatively straightforward, those investors who want advice may have to be more selective.

There are some brokers which have specialist knowledge of AIM stocks and which spend a considerable amount of time researching the AIM market. It clearly makes sense for investors to deal through such brokers so as to take advantage of this expertise.

Due to the tax breaks which are currently available, many brokers run specialist AIM portfolios which have been set up with the intention of mitigating Inheritance Tax (IHT).

As tax law stands at the moment, qualifying AIM companies (which exclude certain types of company such as investment companies or those involved in real estate) are treated as business assets and thus qualify for Business Property Relief on death. This effectively means that if such shares are held at the date of death and have been owned for over two years then they fall out of the owner’s estate with a potential tax saving of up to 40%.

What are Shares?

Shares are often surrounded by mystique but the principle behind them is simple and straightforward. Shares, also known as equities, provide you with part-ownership of a company so when you invest in shares; you are buying ‘a share’ of that business. Companies issue shares to raise money and investors buy shares in a business because they believe the company will do well and they want to ‘share’ in its success.

Companies do not have to be quoted on the stock market to issue shares. When businesses start out, many of them raise money from outside investors, who are given a share of the company in return. These investors tend to be friends, family or benefactors and their shares are known as unquoted because the companies are not listed on any stockmarket.

Even if a company states that it is a ‘PLC’ (Public Limited Company) it does not necessarily mean it is listed on a Stock Exchange.  This is just a legal status for the company.

When a company wants to raise money more widely, it can apply to become publicly listed or quoted on an exchange, such as the London Stock Exchange. Once it has gone through the approval process the company then has its shares admitted to trading on an exchange and its shares can be bought by individual investors and large, investing institutions, such as pension funds and life assurers. Companies have to satisfy certain legal and financial criteria before their shares can be listed on a stockmarket and the shares are known as quoted because their prices are quoted every day on a stock exchange.

Owning shares in a company means that you are entitled to a say in its affairs. All PLCs have annual meetings, where shareholders vote on matters such as the company’s accounts, directors’ appointments and pay packages.

Companies also hold meetings for shareholders when they are about to make big changes to their business, such as buying or selling parts of the company or raising fresh capital.

Trading in shares is executed by stockbrokers, who buy and sell shares on behalf of investors. Increasingly, investors buy shares over the internet, using online broking services.

(Source - London Stock Exchange)

Why invest in Shares?

Studies have proved, time and again, that shares (or equities) are one of the best long-term investments in the financial market place. They tend to outperform government bonds, corporate bonds, property and many other types of asset.

Share prices can go down as well as up so buying shares is not without risk, but over the long term, they can generate good returns. If you want to double your money in a year, for example, buying shares is not the best way to do it. But if you want to invest for ten or 20 years, shares may be a rewarding investment.

Shares are designed to provide investors with two types of return, annual income and long-term capital growth.

Most shares offer income in the form of dividends, which are typically paid twice a year. Dividends can be seen as a reward for shareholders. They are paid when a company is profitable and has cash in the bank after it has satisfied all its obligations.

In most cases, the more profitable a company is, the higher the dividend payments. If a company is making substantial amounts of money and making significant dividend payments, it is usually considered a good investment so the share price rises.

Investors may buy shares specifically for income. Many companies generate substantial amounts of cash every year. They may use some of that money for general corporate purposes, such as paying rent and wage bills, and they may use some of the money to invest in equipment, research and development. But a proportion of that money may be paid to investors as a dividend. As dividends are usually paid out twice a year, they can provide investors with a regular income.

Companies that pay generous dividends are known as income stocks.

Some companies have heavy investment programmes so they plough their profits back into the business. These companies are often at an early stage of their development and they are keen to expand and grow. They are known as growth businesses and, if their plans succeed, their share price will increase substantially.

Long-term capital growth comes about when a share price increases over a period of time.

(Source - London Stock Exchange)

What influences share prices?

Share prices can be affected by a wide variety of issues but the two principal factors are the performance of the company that has issued the shares and the wider environment.

Listed companies publish their financial results twice a year. They provide trading updates twice a year as well. These figures and statements give the investment community an insight into a company’s performance.

Companies are also obliged to publicly notify any event that could influence their share price, such as a takeover bid or the launch of a new product.These are known as regulatory announcements and they must be made via a regulatory channel known as an approved RIS (Regulatory Information Service) before the information is published anywhere else.

For more information on RNS the Exchange’s RIS please click here.

Investors can also find out information on a company from external sources, such as the press, stockbroker reports and specialist magazines or websites.

If a company is performing well, and is expected to continue to do well, its share price should benefit. Share prices tend to anticipate the future so they can rise if a company has good prospects and fall if the outlook is not promising.

Share prices are also affected by the wider environment.

  • If economic conditions are good and expected to continue that way, investors tend to feel confident. Companies are more likely to perform well and deliver strong profits when the economic climate is benign so they are more likely to pay rising dividends. Under such circumstances, demand for shares tends to rise and prices increase;
  • If the economic climate is difficult however, investors may feel nervous. They may worry that a company’s profitability will suffer if economic conditions are difficult. Fears about future profits tend to reduce demand for shares so prices may fall.

This means that, in tough times, robust companies can see their share price fall, even if they are doing well. Conversely, companies can benefit from a rising market and their share price may go up, even if the underlying business is lacklustre.

Over the long-term however, markets tend to reward robust, well-managed companies and their share prices rise.

Investment Objectives

Just as companies have different characteristics, so do investors. Some people buy shares because they want a regular income. Some people buy shares because they want to see their capital appreciate significantly. Some investors are extremely cautious; others prefer taking risks.

Before investing in shares, it is advisable to think about your own investment profile.

  • Investors seeking regular dividends that rise steadily every year will be attracted to income stocks;
  • Investors who are less in need of income but are keen on capital gain may be more attracted to growth stocks;
  • Investors who are buying shares for a specific purpose, such as their child’s education, may be extremely risk-averse. They will look for the most solid, reliable stocks in the market, such as large oil or utility shares;
  • Other investors may be buying shares with surplus cash and they may be more prepared to take risks with their money.

Over time, most shares will generate reasonable returns but different investors have different timeframes and the longer shares are held, the more opportunity they have to perform.

Most investors in shares are looking for a combination of income and capital gain. This can best be achieved through what is known as a diversified portfolio. Instead of buying one or two shares, investors buy a range of shares, each with different characteristics. These will include some large companies, some small; some from relatively safe sectors, some from higher growth areas.

If the right choice is made, this selection of shares can deliver capital growth, dividend income and a balance of risk and reward.