How the stock market works

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5. AIM and OFEX

The Alternative Investment Market (AIM)

This is the junior market of the London Stock Exchange, set up in 1995. The conditions for listing on AIM are much less demanding than for the main market, and the companies on AIM tend to be smaller and younger. There is an element of 'make or break' about many of them.

AIM companies are often too small for institutional funds to invest in, which is both good news and bad news for private investors.

• It's good because it means that the stocks are under-researched and you stand a chance of spotting a high growth stock at a good price before anybody else.
• It's bad because the liquidity of AIM stocks can be poor. AIM stocks often only have one market maker, and the spread can be wide.

There is a natural process of graduation by successful AIM companies to the main market. They do this because they want to attract a following among the large institutions, brokers and research houses, and because it is easier to raise large sums of capital from the main list than on AIM.

OFEX is not regulated by the Stock Exchange but is run by J.P. Jenkins, a respected broker specialising in smaller companies, and authorised by the Financial Services Authority (FSA). Admission to OFEX is decided by a nameless panel of 'wise men' and the only requirement is that companies must publish accounts twice a year.

OFEX companies are even more speculative investments than AIM companies, and liquidity is poor as trades are carried out on a matched bargain basis. (i.e. you can only sell if J.P. Jenkins finds a buyer for your shares). This doesn't mean you shouldn't invest in OFEX companies. The market serves a useful purpose. It just means that OFEX is risky.

1. Why do companies list on the Stock Exchange? 2. Offers for sale 3. Offers by tender, and other methods of admission 4. The Official List 5. AIM and OFEX 6. Different types of share 7. Reasons for market indices 8. The FTSE indices 9. Sectors 10. Scrip issues 11. Rights issues 12. Convertibles 13. Warrants 14. Share buybacks 15. Shareholder perks 16. Suspension 17. Insolvency 18. Conclusion