Tuesday 8 February 2011

AIM's success is the City's pet hate

Front of the Telegraph business section today is another attack on the AIM market. Poor old AIM, it cannot live down its reputation, forever sealed years ago. The thing is that companies on AIM are often small and somewhat poorly run. You can't excuse a Desire Petroleum for potentially misleading investors, but you can many other firms for running into business model difficulties.

The attack from the big money managers is always that AIM companies are poorly regulated through the LSE and this lax regulation allows crooks to abound.

Yet AIM companies are where retail investors have a chance; the stocks are under researched so if you bother you may find an angle that big city houses miss. Companies are tied to events and not the FTSE, buy many FTSE100 shares and you may as well have a FTSE tracker for all the difference it will make.

Many AIM companies these days are natural resources companies, they are looking to develop mines and oil resources in the midst of the long-term commodity boom; its high risk, high reward stuff. But the rewards are there, for every company that fails and lose shareholders money there are some who make fabulous rewards. GKP, subject of the last post, was under 10p just 2 years ago and is now nearer £2.

Of course money managers also have some ulterior motives here, they have large amounts of money to manage which means their risk weighting in small companies does not add up for them. Also they want even more funds under management and are not very happy when private investors want to chance their own funds rather than invest in their huge, low return vehicles; not very good for one's bonus after all.

AIM's success is also shown by some recent moves in the Spreadbetting world. The companies are de-listing AIM shares if possible - see CMC Market's this week. CMC say due to volatility; logic says they are losing their bets to canny investors and bookies don't make markets to do this, hence they are closing it. That is not telling me that AIM is a failure, it is saying that finally retail investors are gaining power against the City. With the power of the internet to research and free technical analysis tools, small investors can be equipped to do better against the "Market Machine" than ever before; it's still not a fair fight, but is a vast improvement on past years. The internet is a great leveller throught delivering access to information.

The calls of 'risk' and 'casino' are not coming in the main from small investors, but from big institutions (and America, where the NYSE has had no similar success). Of course regulation can always be improved and the LSE can look at this, but AIM is an interesting market and a force for good for smaller companies seeking finance for risky ventures. Also, plenty of main market companies tip up too, look at Connaught or Jarvis recently, the idea that it is only AIM that is high risk in recessionary times is delusional.

The constant sniping of the City Funds and their pals in the media proves it.


Anonymous said...

I couldn't agree more. Many of these (AIM) companies have management of the highest calibre and fantastic proepects, but the whole sector is often damned for the antics of a few.

I am not sure whether tighter regulation of the companies is desirable, it seems quite reasonable at present, but of course "caveat emptor" must be the watchword of all investors.

Anonymous said...

I would imagine CMC are making money off the spread rather than taking the opposite side of the spread betters. They probably trade the equivalent amount of shares when their customer places a deal, so no risk to them, unless their customers blow their accounts and end up being chased through the courts to meet a margin call.

Then you can see why they have dumped AIM stocks.

CityUnslicker said...

Anon 1.50 - true to a point, but if they were pure market makers with all risk hedged out it would not work; they risk manage their share positions and this is proving too hard to do due to volatility - easy to say blame the customers and their constant losses. If this were the case they could offer with no leverage. The reason they like the leverage is that leverage drives their profits.

Steven_L said...

Maybe the AIM companies should have to plaster an FSA risk warning on their annual reports so that fund managers in big insurance know what they are getting themselves in for.

Investments can go down as well as up

Something like that?

Timbo614 said...

I've just started looking at spread betting in order to gain some leverage :( and the brokers waffle says that they make their money on the spread. But looking at the test accounts (Play money) I have set up the spreads are sometimes very close to the "real" spread which does not leave them much room / time for errors. In addition, there are variable margins - it appears the smaller the share capitalisation the higher the margin (10% rising to 30%) you have to post out of your deposited funds.

Having looked - it looks scary! I might just stick with dividend skimming :(

Steven_L said...

The biggest con on spread betting is that the finance costs increase in line with the value of your position.

So you buy £100 worth of leverage and are paying £3 a year, but if it rises to £200 the cost of your leverage rises to £6 a year, all charged daily of course.

Can you still get margin accounts where you actually borrow a fixed amount and buy the stock?