When people talk about investing in shares in the United Kingdom, they commonly refer to the well known blue chip businesses that make up the FTSE 100. This index is also used as a bellwether for the stock market as a whole. Kavan Choksi, however, does stress upon the fact that there is a wealth of investment options in the country beyond the UK’s flagship index, with the potential for high returns from smaller companies in comparison to their larger counterparts. Investors in the FTSE Fledgling index, in fact, would have enjoyed a total return of nearly 40% over the last five years, which is considerably higher than the 19% return for the FTSE 100.
Kavan Choksi sheds light on some of the important aspects of the UK’s stock market
The London Stock Exchange (LSE) is among the oldest stock exchanges on the planet, and it allows companies of varying types to issue shares and bonds to raise money. Once bonds and shares are issued, they can be traded by institutional and private investors. The LSE is known to have two markets, the Main Market and the Alternative Investment Market (AIM), which differ in regard to the type of the listed companies and their regulatory requirements.
More than 1300 companies from seventy different nations are listed on the Main Market of LSE. These companies have to meet stringent regulatory requirements before their shares can be listed on the Main Markets. The Financial Conduct Authority (FCA), however, has recently relaxed listing rules for attracting initial public offerings to the list on the LSE instead of on rival European bourses. This included a reduction in the “free float” shares from 25% to 10%, but an increase in the minimum market capitalization from £700,000 to £30 million. The Main Market broadly includes three segments, which cover specialist funds, premium companies, and high-growth companies.
Alternative Investment Market (AIM), also known as the junior market, was established in 1995. It was meant to be an alternative market for medium and small companies to access funding. More than 1200 companies are currently listed on AIM. Many companies choose to list on AIM due to lighter regulatory requirements that are less time-consuming and expensive than those on the Main Market. There is no such minimum ‘free float’ or market capitalization in this situation. Unlike the Main Market, companies also do not need a three-year trading history. Therefore, AIM manages to magnetize higher-growth companies in an earlier stage of development. As per Kavan Choksi, AIM companies achieve average revenue growth of 40% in their first years, subsequent to the initial public offering. It is important to note that as of now, AIM is no longer meant for smaller companies, and even includes many enterprises with a market capitalization of over £1 billion. There is a range of indices on both the AIM and Main Markets that focus on tracking the aggregate performance of selected groups of companies. These indices are reviewed quarterly, and provide an opportunity for companies to be promoted to a higher index if their market capitalization rises sufficiently.