Steady your AIM before Shooting

Tuesday, 22nd May 2018 09:05 - by Ranjeet Singh

I have been very fortunate in my career in as much that I have experienced many different types of investment products and markets whilst working for a number of different companies. From massive, international investment banks like Deutsche Bank and RBS to smaller specialist outfits like Hoodless Brennan, which later became Beaufort Securities, and later still became bankrupt (more about that later).

And it’s because of this varied experience and knowledge in different markets that I have seen things within the investment world that most people don’t see. I know successful traders and fund managers who know their particular inside game inside out but have no clue about anything that sits outside of a 5m radius from their circle of expertise. For me that’s crazy and dangerous. It’s also incredibly limiting to them and their clients.

Think of it like this. Imagine I have a client who comes to me and wants to build a truly diversified investment portfolio but doesn’t necessarily want to buy funds because let’s say he or she doesn’t like the fees or the inflexibility of the fund. As a professional investor with extensive experience in different markets (blue-chip, small cap, derivatives etc.) I am at a great advantage to those one-trick ponies who have not been in the markets that I have because I can now offer advice on each of the specific areas whereas they can’t.

In other words, I could comfortably build a bespoke investment portfolio with individual stocks that would satisfy the requirements of my client rather than just look at fund and rely on some random fund manager that I have no control over. There’s nothing wrong in fund managers by the way (well the good ones at least) but in the current market climate it pays to have well rounded experience.

The reason I talk about this today is because I read an article in the Evening Standard recently called “Why retail investors need more protection from AIM’s cowboys” and it talked about how unscrupulous brokers were involved in principal dealing which basically ripped off the client. Well the reason people get ripped off is simply because of a lack of information and knowledge. That’s the same reason that anybody gets ripped off.

And because I have invested and worked in the AIM Market for many years I understand the intricacies of this market very well. In fact, I feel that I know this market much better than those people who only have ever worked at the same big bank for all of their lives. So, let me explain about the AIM market and specifically a strategy used by brokers with penny shares – it’s something that you may have heard about but perhaps not fully appreciated, and it’s called principal dealing.

It works in a simple way which is this. A company needs to raise capital and is unable to do so through the well-known larger institutions like Barclays, Credit Suisse, JP Morgan and so on. The big firms are always the first choice of the capital raising company capital because they can raise all of the capital quickly with little fuss through large institutional interest. However, if the large, blue-chip institutional interest is not there then the firm is forced to go to the retail market, i.e. to the regular every day investor.

Whilst this in itself is not a problem it can be open to abuse. That’s because brokerage firms often get a deep discount from the company looking to raise capital to be incentivised to offer the stock to its clients. The clients still have to benefit and also get a discount to make the deal work but how that discount is shared between brokerage firm and client is not usually in the client’s favour and that is certainly something to consider.

For example, if a stock trades at 3p and the firm acquires the stock on a principal basis at 2p then clearly that’s a massive profit for the firm and could encourage the firm to act inappropriately e.g. pressurised selling, offering incentive to their sales team to reach certain targets etc. The FCA does a great job to manage this downside and risk but it’s still a problem that needs to be closely managed and monitored.

Generally speaking if it’s a good company and the discount is shared fairly between the firm and the client, then there is no problem because the client buys at a discount to the market price and the stock will probably go up so everybody wins. The problem does however come when firms recommend those companies in which it can acquire the greatest amount of discount. That’s because it is usually (although not always) those firms which are willing to give the deepest discount, that are most desperate to raise the capital and that means their business is not as sound as perhaps it should be.

It’s a very complicated matter and I just can’t do it justice in this short report but I will tell you this. The AIM market should not be avoided because it’s a great place to invest. And even brokerage firms that do principal dealing are not all bad.

Like I always say, it’s not the product that is bad, it’s how it is used. I wrote an article a couple of years suggesting that CFDs (Contracts For Difference) should really be called Created For Dealers because they were making so much money from them at the retail investors expense. But I was quick to point out that it wasn’t the CFDs to blame, it was the firm operating CFDs in a way to suit them.

It’s the same with the AIM market and it’s the same with principal dealing. The AIM market is there as a great way for smaller, less established companies to get their foot onto the stock market ladder. The risks are high but so too are the returns. The same goes with principal dealing – it’s possible for everybody to win which is what this game is all about.

Finally, it’s worth mentioning that there are also some amazing Inheritance Tax mitigation strategies available with the AIM market if you hold certain AIM shares for more than 2 years. Imagine that – you wipe out 40% tax on your estate tax bill and you could make extra money on top.

If you are not sure then simply don’t invest. That’s my best tip to you. Stick with what you know. But if you want to learn then invest in yourself and get the information that you need.

All in all, it’s very simple – like Warren Buffet said, to reduce your risk you need to ‘increase your knowledge’.

That’s my mission in life for the investment world – to help others learn and I hope that these small nuggets of knowledge will help you to do exactly that.

Today’s video can be seen at https://youtu.be/EM9a-zPbTHA

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.