It’s all change for small cap investors on August 5 when they’ll finally be able to use Individual Savings Accounts to buy shares quoted on the Alternative Investment Market. The long awaited rule change means that dividends and capital growth on all AIM shares can now be earned tax-free – as is already the case for dual-listed AIM and Main Market stocks. Currently, investors can channel up to £11,520 annually via a stocks & shares ISA and the new freedom means they now have an additional 1,000 shares to choose from. 

Investor groups and market participants have been calling for this change in the hope that it will not only make AIM shares more appealing to a broader range of investors but will also encourage more liquidity in the trading of those shares. It follows news in March that stamp duty on the purchase of AIM shares, currently 0.5%, will be abolished from next April. 

Getting to grips with AIM 

Investors looking closely at AIM for the first time will see a performance this year that’s frankly been underwhelming compared to other London markets. At the current level of 3337 points, the AIM 100 is up 5% so far this year, with little sign of the bullish conditions seen on the FTSE 350, which have driven that index up by nearly 14%. 

Over the past five years AIM has seen a dramatic fall in new money raised for companies and stubbornly high levels of de-listings that has dragged the net number of constituents from 1,694 in 2007 to 1,085. According to broker Allenby Capital, £3.4bn of AIM shares were traded in June this year – down from a high of £7.01bn in June 2007. Those figures won’t have been helped by the fact that AIM is a popular destination for small natural resources companies; oil & gas and mining stocks together represent 27% of the market by market cap. Based on relative price strength, those sectors have underperformed London markets by -26.1% and -43.5% respectively over the past year. 

In search of quality 

But despite the volatility and sector concentration that has characterised the perception of AIM in recent years, there are many solid companies to be found amongst the blue sky punts and basket cases (Paul Scott’s daily Small Cap Value Report is an…

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