AIM gets a lot of bad press only some of which is justified. As onlineretailers, ASOS and Boohoo.Com andtonic waterspecialist Fevertreehave shown, its certainly possible for great businesses to grow and thrive outside of the main market, while also generating substantial wealth for their shareholders.
Aside from standardrules, likebeing diversified and avoiding companies with high levels of debt, here are a few more suggestions for how investors can improve their stock-picking prowess on the junior market.
Caution bulletin boards ahead
Many private investors enjoy reading and contributing to bulletin boards or discussion forums on their favourite shares. Someof the most popular boards relate to specific AIM shares and attract hundreds of posts every day.
Unfortunately, bulletin boards also attract those keento manipulate the behaviour of less experiencedinvestors for their own gain by, for example, posting overly optimistic comments designed to encourage the latter to buy shares in a specific, probably high riskcompany. Having successfully raised the price, these individuals will then sell up and move on, potentially leaving those still holding the shares with largelosses.
As in life, if something sounds too good to be true, it probably is. If a post isnt based on any available information, then its content is highly speculative, possibly illegal (if the person knows something the market doesnt), or just plain wrong.
Even if the information is valuable, be aware that the contributormay have completely different financial goals, attitude to risk and a longer/shorter investing horizon. You wouldnt take financial advice from someonein the street, so why base an investment decision purely on a bulletin board post? Trust in your own research.
Check out management
Fewinvestorswould question the assertion that having a competent management team is vital for any company to flourish. This is arguably even more important on AIM, given that many of those listedare at an early stage of development.For this reason, part of any prospective investors research should involve scrutinising the track records of those in charge. Do they have a record of successin this industry and have they shown an ability to growa company while remaining financially disciplined?
Another useful way of judging how much a CEOcaresabout the company they leadis to ascertain just how much of it they own. Those with substantial skin in the gameare more likely to take decisions in the interests of shareholders because, ultimately, their own capital is at risk.
Watch the spread
Another thing to watch out for when buying shares in AIM-listed companies is the spread the difference between the bid and offer prices. Typically, this difference will be a lot greater compared to shareson the main market. The widerthe spread, the more money youre losing by simply buying stockin that business. Ifthe spread is15%, youll need the shares to rise by the same amount just to break even.
Wide spreads canindicate that shares are tightly-held. However, they can also indicate companies with questionable prospects and poor liquidity. In the event of an economic shock, it can be very hard to jettisonsuch stocks from your portfolio. For this reason, holding a large number of highly illiquid AIM shares isnt recommended, whatever their prospects.
Make no mistake
Picking the right AIM stock at the right time can turbo-charge your wealth over only a short period of time. Pick the wrong stock at the wrong time and the results can be very damaging indeed.
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Paul Summers owns shares in boohoo.com. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo.com. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.