AIM: The most successful growth market in the world?

The London Stock Exchange is fond of trumpeting the Alternative Investment Market (AIM), describing it as 'The Most Successful Growth Market in the World'. And yet, whenever I visit the City, I am told that there is a lot of rubbish on AIM. So just how successful is it?

The purpose of AIM is to enable small companies to raise money without having to endure, and pay for, the arduous qualification process and subsequent regulatory requirements of a listing on the main London market. The following table summarises the main differences in the admission criteria for the Main Market and AIM.

Corporate refugees, gold diggers and opportunists... they all find a home on AIM!

The most important item in the table is that companies can come to AIM with no trading record. Ideally, all AIM debutantes should be run by budding entrepreneurs, with all the ingredients for a successful business - except capital. Investors would provide that capital in return for the high potential reward of backing a new business and, of course, the tax breaks that apply to AIM investments. Companies listed on the AIM exchange are more volatile and risky due to their size. Companies on this exchange often have a wide spread meaning that they may be hard to sell at the price you bought them for.

But the law of unintended consequences has taken a hand. Joining AIM through one door has been a steady stream (25 within the last year) of refugees fleeing from the regulation and expense of the Main Market. By definition these are long established companies, with no particular requirement for fresh capital. Jostling their way in through another entrance has been a crowd of what I can only describe as corporate opportunists.

There are now 1,673 companies listed on AIM, of which 481 have a market value below £10m and 103 are worth less than £2m. Amongst these tiddlers you will find shell companies, all those mining hopefuls that I mentioned on page one and other companies looking for a deal to justify their existence. The cost of an AIM listing is rarely less than £200,000, and the Director of one AIM company told me that the annual costs associated with being a public company - you need a broker, non-executive directors, corporate PR and so on - are around £100,000. So these tiny companies have to be pretty special to justify their public existence - and to make a good return for their shareholders.

Even if AIM struggles, the Red Hot portfolio will be protected

Although the AIM index has been in a nice uptrend for the last two years, its longer history is decidedly mixed, and one reason is that every bull run has always attracted companies of dubious worth, many of which have subsequently collapsed in a heap.

The London Stock Exchange likes to promote AIM as the natural home of the small investor, and lists on its website a large number of financial quotations. Before it next broadcasts the fact that more than 2,500 companies have been admitted to AIM since its launch and more than £50 billion has been raised from investors, it would do well to remember the following quote from Aaron Levenstein: "Statistics are like a bikini. What they reveal is suggestive, but what they conceal is vital." As for Red Hot Penny Shares ® , I will continue to recommend companies of real substance, and not paper kites.

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John tells us… “Of the eleven companies I have invested in I am up in 10 and slightly down in 1, and not counting having sold Gulf keystone at 144% profit, I am 7% up on the remainder - where else can I get that sort of return?"