What’s wrong with AIM?

AIM is “the most successful growth market in the world” declares the LSE website. “It is now firmly established as the world’s pre-eminent stock market for young, growing companies,” says Head of AIM, Martin Graham.

What’s AIM all about? It’s the London Stock Exchange’s international stockmarket for smaller firms ranging from young, venture capital-backed start-ups to well-established, mature organisations looking to expand, says the LSE, and apparently “has been specifically designed with smaller companies in mind.” We repeatedly hear about “the success of AIM,” how companies “continue to flourish” and how it is “hugely popular with investors”.

I think it’s time for a little dose of reality.

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Let’s start by looking at a long-term chart – the FTSE AIM All-share index since 1997.

Long-term graph of AIM share prices

It’s hardly what you’d call a ‘success’. I don’t see companies continuing ‘to flourish’. Shockingly, the index is lower than 11 years ago, despite the fact that there has been plenty of consumer price inflation in between. My crude technical analysis says that now key support around 1000 has been broken, we are on course to retest the 2003 lows below 600, with maybe some resistance en route at 800.

Let’s zoom in and look at a more recent chart.

Short-term graph of AIM share prices

It’s horrible. The trend is down, down, down – even with all those oil, gas and mining stocks. How can AIM be ‘hugely popular with investors’? Are all investors on the short side – i.e. they aren’t buying this stuff, they’re selling it with the intention of buying back lower down and making their profits that way? There are a few notable exceptions of course but in general, the charts show that if your firm is listed on AIM, the price of your shares is falling.

AIM’s success

So what’s the LSE so happy about? The real success of AIM has been to get a lot of companies to launch their shares on the exchange in an IPO (Initial Public Offering). There are some 1700 or so companies now listed. And it is in the listing (which comes with endless fees) that exchange, the brokers and the advisers earn their money.

Or did earn their money. Today that source of easy money looks to have dried up – new listings have plunged. Look at the Daily Telegraph chart below:

Graph of number of companies floated on AIM

The LSE will no doubt blame this collapse on the credit crunch. And there’s no doubt these are difficult markets, particularly for small caps. But much of the blame also belongs to the market itself.

Stock exchange operators want to companies to list and there’s nothing wrong with that. The problem is with happens next. Once a company has ‘floated’, the exchange, the brokers, the advisers and so on have all made their money. While they might like to see companies thrive, financially it doesn’t matter to them whether the company sinks or swims.

As Charles Breese, founder of Armshare.com, says, the LSE is too intent on simply recruiting new Aim entrants and is not doing enough to stimulate the secondary market, where existing holders are able to sell out and new investors can get involved.

On the exchanges in Canada, if you want to sell a stock, you offer it at a set price. That offer is placed on the exchange and if somebody wants to buy, they can at that level. In short, this is a direct, transparent market. AIM has seen fit to use a different method, the market maker system, with no such transparency. I reckon that as a result of this system – and the market makers operating it – liquidity on the exchange has all but dried up.

Let me explain. To buy a share, my broker now has to contact a market maker, who quotes both a buy and sell price. But the ‘spread’ between these can be outrageous. On one occasion last year, I wanted to buy some stock in KEFI (AIM:KEFI), a gold explorer in Turkey who I believe has some great assets, some fine geologists and plenty of potential. The stock was trading at 3p. The market makers offered 2p to sell and 4p to buy. That’s a spread of 2p on a company trading at 3p – or 66%. Absurd.

As ‘grass roots explorer’, I’m already taking a risk buying into this company at all. If it doubled in value to 6p and the market makers offered a similar spread, I would then be able to sell out at 5p – having bought at 4p. So I would make 1p, or 25%, on a company that’s up 100%. The market makers meanwhile have made the profit without taking any of the risk.

Sadly, many of us have had to buy into these spreads in order to buy into AIM stocks. But as it’s so hard to make any money, it’s no surprise that I’m repeatedly hearing experienced investors saying, ‘That’s it. I’ve had it with AIM stocks. I’m not touching them again.’ Meanwhile, the poor companies that have been talked into listing on the exchange are left high and dry with no trading. How is this a market ‘designed with smaller companies in mind?’

There are gold companies listed on AIM with 1 million ounces of proven reserves on the ground – Kryso, is one example – trading at 25% of the valuations of similar companies in Canada and Australia. If anyone from the LSE is reading this, please change to a transparent, order-driven system and you might be able to regain some of the ground you have lost to the Australian, Canadian and even Norwegian exchanges.

I know these are difficult times for stocks in general and for small caps in particular. But if you want to stand a chance you must get your house in order. Your market has not given small investors – indeed any investors – anything like the rewards they deserve for investing in such high-risk companies. If any readers are so inclined, I urge you to press the LSE on the same issue. Otherwise nothing will change.

As a post script, last week I tipped Leyshon (AIM:LRL) and afterwards saw some very suspicious action. Various people are looking into this and I’ll have more for you as soon as they get back to me.

Turning to the wider markets…

UK shares hit their lowest level in more than 2 ½ years on Friday as the FTSE 100 index retreated another 64 points in a 1.2% drop to 5413. It was hard to find bright spots but ITV managed to buck the trend on takeover talk, climbing almost 4%. Bradford & Bingley had a horrid day, crashing 18% to below its emergency rights issue price as potential backer TPG pulled its support offer. Alliance & Leicester lost a further 12% in sympathy, while HBOS dropped 3% and Barclays 4%. After its profit warning, Marks & Spencer fell a further 4%, although Tesco added 5% while Wm Morrison put on 3%

European markets continued to suffer, with the German Xetra Dax sliding 1.3% to 6,272 and the French CAC 40 losing 1.8% to 4,266.

US stocks generally rallied, with the Dow Jones Industrial Average adding 73 points, a 0.6% gain, to 11,289, while the wider S&P 500 put on 0.1% to 1,263. The tech-heavy Nasdaq Composite fell 0.3% to 2,245.

Overnight the Japanese market recovered, with the Nikkei 225 advancing 122 points to 13,360. In Hong Kong, the Hang Seng put on 489 points to 21,913.

Brent spot was trading this morning at $143, while spot gold was at $922. Silver was trading at $17.90 and Platinum was at $1987.

In the forex markets this morning, sterling was trading against the US dollar at 1.9711 and against the euro at 1.2600. The dollar was trading at 0.6393 against the euro and 107.55 against the Japanese yen.

Category: Buying Aim Shares

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