Spread Betting on Small Caps and AIM Stocks

It is possible to place bets on small cap and stocks listed on AIM (the Alternative Investment Market). There are numerous advantages of fishing around among smaller companies but there are important disadvantages too, which you must be aware of.

Advantages

The principle advantage of looking into smaller companies is that the market here is less efficient. There is scope here to build up knowledge of a company or sector such that you know more than the market. In order words, your estimate of its value will be better than that of the market.

On the short side the small cap world is the most interesting as many of these companies collapse. If you are an expert in bankruptcy then there are big opportunities (and risks) here.

Disadvantages

One of the fundamental problems with spread betting on small companies is that some of them can't really be shorted (i.e. the broker just won't let you short it) and the stock borrowing costs can be very high. In the case of very high borrowing costs this can totally erode your potential profits to the point where there is no point doing the trade.

Furthermore, you can't bet on every company. Depending on the broker the minimum market cap of a stock which you can bet on can be between £10 and £50 million. Annoyingly when you look at the sub £10 million companies on AIM there are some fantastic shorts that simply can't be shorted.

Though I would argue the most interesting opportunities in small caps are typically on the short side you have to be extremely careful. AIM stocks are very volatile and if your wrong the stock can easily surge several hundred percent. For example if you short a small cap oil company because you think it will run out of cash and it subsequently finds one billion barrels of oil your account is going to be wiped out. Naturally, you could use a stop loss to prevent this but because of the volatility the stop distance will have to be pretty large.