Trading AIM Shares

Many investors are still not aware that they are able to trade AIM companies via CFDs and are still continuing to use outdated products to trade. Traditionally, investors trading Aim shares over the short term have used T20 trades, allowing them to agree to buy a fixed number of shares at a fixed price and paying for them in 20 days’ time. The costs of the trade incurred by the investor will include a commission of up to 1.5% to buy and another 1.5% to sell, a 1% premium to extend the settlement and finally stamp duty of 0.5%. Therefore, taking trading costs into effect, investors require a 4.5% movement in share price over a very short timescale (20 Days) in order to break even.

Trading CFDs has a number of advantages over the traditional method outlined above, not least because in some circumstances commissions start from as little as 0.1% to buy and 0.1% to sell with no Stamp Duty or settlement premium to pay. If the share price moves by over 0.2% the trade is straight into profit, or to put it another way 4.3% better off than a T20 trade.

More importantly CFDs can be held indefinitely with no expiry date whereas if T20 trades are to be “rolled over” on expiry for another 20 days then they will have to be sold and purchased, thereby incurring costs again and losing the spread. Unsurprisingly there has been a dramatic influx of investors that are now taking advantage of trading AIM Shares via CFDs.

One of the most actively traded sectors within the AIM market has been the junior oil and gas sector. It is easy to see why this is the case when over the last year, research suggests that 131 AIM stocks have more than doubled over the last 12 months, and 16 stocks have increased by over 500%, meaning that the returns can be very high. Of course, on the flipside there are other companies such as Desire Petroleum whose shares have fallen by more than 90% from their highs, so both the risks and the rewards of trading in this sector can be significant.

Another attraction of trading the AIM market with CFDs is the amount of leverage. Rather than pay the full value of a transaction, investors only need to pay a percentage of the whole trade value when opening the position. What this means to investors is that they have to generally commit circa 25% (£2,500) margin to purchase £10,000 worth of shares. This is referred to as the ‘Initial Margin’. The key point is that the margin allows leverage, so that investors can access a larger amount of shares than they would be able to if buying or selling the shares themselves, and allowing the opportunity to amplify returns either positively or negatively.

“Trading CFDs has a number of advantages over the traditional method outlined above, not least because in some circumstances commissions start From as little as 0.1% to buy and 0.1% to sell”

With this increase in CFD trading comes a more discerning investor, who is now looking to receive a more sophisticated service from their brokers above simple execution of orders. Increasingly traders are looking for information such as Level2 Data (DMA), trading flows, trading ideas, charting packages and the ability to trade a vast number of investment instruments across multiple exchanges and markets.

DMA (Direct Market Access) has become one of the buzz words in the investment industry. Put simply there are two models of trading CFD’s which then have different results depending on when they are used.

The first sees prices based around the underlying market price, but with no obligation to match the exchange bid and offer. This means that the CFD supplier provides the price and controls the investor’s entry and exit price, and can therefore potentially benefit from losses, which inevitably creates a conflict.

The alternative is DMA where the prices shown match the exchange and consequently that is the price investors trade at, ensuring transparent pricing and meaning investors are simply trading against the market. With DMA, investors also have the option to enter their trade at a price that they want to buy directly onto the order book, creating the opportunity to trade in within the spread.

AIM companies have the added advantage for short term investors of large spreads and this allows investors to place orders within the spread when the market is very volatile. One of the reasons this market is volatile is that large buy & sell orders can move the price dramatically. When this occurs it’s possible that stops will be triggered when prices spike down or up. Unlike T20 trading where there is no ability to place stops or limits, on a CFD these are easy to place, trailing stops and normal stops. More importantly you can have Guaranteed Stops that allow an absolute limited liability on your original position to protect against sharp movements against your trading position.

It is important to consider that trading AIM shares with a CFD will not be for everyone as they are a high risk investment using a high risk tool that increases the risk and return. That said, the CFD sector is a market that is constantly evolving in conjunction with new products and trading tools being released e.g. CFD SIPPS or mobile trading, meaning CFD’s are fast becoming a standard part of an investor’s portfolio.