Last Monday, investing became cheaper. That’s right: the government axed the Stamp Duty payable on investments in shares traded on London’s smaller-company AIM market.
And growth-oriented AIM, of course, is where some of the market’s juiciest gains are to be had.
Look no further than fashion retailer ASOS (LSE: ASC), which fell below 3p a share shortly after listing in 2001, to then rise to over £70 a share earlier this year. Even taking a five-year view, it’s still up more than 990%.
So the axing of Stamp Duty, announced in the 2013 Budget by Chancellor George Osborne, ought to be good news.
But is it?
Easy access
To answer that, let’s just quickly remind ourselves why AIM – London’s Alternative Investment Market – exists in the first place.
Launched in 1995, it provides a way for small, fast-growing companies to gain access to investment funding. Over the years, some 3,000 companies have joined, in the process raising more than £60 billion in new capital.
But it’s also true that companies sign up to AIM – as opposed to London’s main market – to benefit from what the Stock Exchange coyly refers to as AIM’s “pragmatic” approach to regulation.
In short, to join AIM, companies are not required to have a particular financial track record or trading history. Regulation, in short, is ‘light touch’.
Wealth traps
Now, these relaxed entry requirements are great for fast-growing companies that simply haven’t been trading long enough to be eligible for London’s main market, or for companies with less-than-perfect trading records or finances, which might struggle to gain access to the main bourse.
But it’s also a route to market for companies that might exhibit dodgy governance, possess weak business models, have debt-laden balance sheets, or which simply fail to find the oil, gas, gold or other mineral wealth that they were set up to drill for…
Companies, in short, that are likely to go bust, taking investors’ stakes with them.
What’s more, it’s the case that companies can join AIM, find the gaze of public scrutiny not to their liking, and then promptly go private – rarely choosing to do so at a time that does much for the wealth of the AIM investors who backed them.
Decent picks
But as with fashion retailer ASOS, AIM is also home to some first-class businesses that prefer the freedoms – and lower costs – of an AIM listing.
Look at flooring company James Halstead, for instance. Some 100 years old next year, it possesses one of the best dividend records of the entire London stock market, having posted unbroken increases in dividend for 36 years.
Or intellectual property specialist RWS Holdings, where soaring patent applications have delivered an average dividend growth of 14% in recent years.
Or lighting specialist FW Thorpe, another rock-solid business with a solid reputation for delivering cast-iron returns to shareholders.
Not only are these very decent businesses, they’re also shares that in many cases are under the radar screens of the City’s fund managers – providing an opportunity for canny investors to sit and bank some juicy dividends until the City does wake up to what it’s been missing.
At which point, the share price can soar – just look at the long-term chart for ASOS, or indeed, any of the companies I’ve mentioned.
Take the plunge?
So does the abolition of Stamp Duty open up an opportunity for investors?
Well, yes. With no Stamp Duty to pay, investing just got cheaper. But not much cheaper – Stamp Duty was only 0.5% of the deal cost, anyway.
Which – for many AIM shares at least – is rather less than the buy-sell spread on the shares in question. So for me, it’s a ‘nice to have’, but not a ground-breaking shift in the whole investing thesis of AIM.
Of bigger import, quite frankly, was the associated relaxation of the rule that prevented investors from holding AIM shares inside an ISA, unless these shares were also quoted on a main market elsewhere.
For as one of our most-popular free special reports, Ten Steps To Making A Million In The Market, points out, the combination of below-the-radar shares, rising dividends, dividend re-investment, and low-cost tax shelters is a powerful way of building wealth. (To learn more, click here—as I say, it’s free to download.)
Hidden treasures
And in any case, the biggest challenge of investing in AIM continues to be the difficulty of sifting through AIM’s dross in search of the relatively few golden nuggets that are there.
They are there – of that be in no doubt – but they’re harder to find than in the market’s very highest echelons, the blue-blooded blue chips of the FTSE 100.