The Alternative Investment Market is set to celebrate its 10th anniversary in resurgent style.Aim was established in 1995 as a successor to the Unlisted Securities Market (USM). Aim’s market capitalisations are typically small, effectively making it the market for smaller companies, but recently a number of bigger players have seen its attractions. Some of the bigger Aim stocks now have considerably greater market capitalisations than many of the smaller stocks on the main index. As a result, Aim has moved beyond its “start-up” status and is promising much greater diversity. There are now over 900 companies listed and many more issues are anticipated. Household names listed on Aim include Domino’s Pizza, Majestic Wine, Tottenham Hotspur and Coffee Republic. Nevertheless, Aim is still dominated by companies in the sub-50m market-cap range. There is an increased element of risk in this category of holdings but the brave investor can benefit from substantial gains. Often smaller, fledgling companies are experiencing growth and early profits before any market realisation. As their share prices have not moved, the canny investor might be buying stock that is grossly undervalued. The market’s minnows are also often heavily invested in at boardroom level, providing a potent, personal drive for a company to succeed. However, as Aim now also provides a number of bigger stocks, investors may feel more comfortable with the market and better able to assemble a more balanced portfolio. Historically, smaller companies and their perceived lack of product diversification have made the bigger market appear a safer, more defensive choice, especially in times of economic uncertainty. But, in the case of Aim, its greater diversity in the size of its holdings should mitigate some of that fear and provide a greater feeling of security for the investor. It would now be possible to build a portfolio entirely of Aim stocks while maintaining a good spread to mitigate risk. Admittedly, the exploration and production sector is over-represented, as a legacy of Aim’s speculative origins but most other sectors are included, even if only one or two companies represent them. It is also no longer the case that these holdings will all be minnows with short trading histories. Many Aim stocks now have quite lengthy track records and there are over 50 stocks with capitalisations of over 100m. The danger of concentration should not be overlooked. By investing too heavily in smaller companies in the hope of growth, investors expose themselves to greater risk. How can investors approach Aim to mitigate that risk? A careful strategy is crucial. Historically, almost one-fifth of all Aim companies have doubled their value over a three-year period but over a decade most companies have lost rather than gained in value. It is important to maintain a diverse portfolio to help invest and exit at the right moment, and to offset speculative stock with some less striking but more secure offerings. More established stock might include Dobbies Garden Centre, where there is expansion potential, or the retailer Jacques Vert. Of the smaller, riskier stocks, where there is most gain to be had, the natural resources sector is currently holding up well as concerns about oil keep prices high. Over time, this sector may well tail off a little, to be supplemented with other areas, quite possibly healthcare and the recovering technology sector. Examples might include Tissue Science Laboratories and Advanced Medical Solutions. A long-term view is essential, focusing on strong cash balances, good management and the likelihood of profit being made in due course. For those still concerned about investing in the alternative market, it is also worth noting the substantial tax breaks that might encourage investors. Aim holdings act as unquoted stock and therefore have superior tax exemptions. After two years, the majority of Aim stock becomes free from inheritance tax. In terms of capital gains tax, Aim shares fall under the category of “business assets”, meaning that maximum business asset taper relief, in effect a 10 per cent rate on profits, will take effect after just two years of holding the stock. By contrast, stocks on the FTSE All-Share qualify for a minimum of 24 per cent when the asset has been held for 10 years. Aim is also set to make some headlines in the context of venture capital trusts, which have themselves swung back into fashion following tax revisions in April last year. As the new VCT legislation is intended to bolster small and enterprising companies, investors must target companies with less than 15m of assets – among some other criteria. Aim’s popularity and diversity make Aim stocks particularly attractive in this arena. An investor can now invest up to 200,000 in a VCT and look forward to 40 per cent income tax relief – in place of capital gains tax deferral – with the single proviso that shares must be held for at least three years. The Aim market is clearly maturing just in time for its 10th anniversary. It has historically been seen as a poor cousin to the main market but it has expanded to become a vibrant investment area in its own right – a trend which looks set to continue.