Christopher Spink's Pick of AIM

With all but 20 stocks now boasting two or more market makers, AIM is becoming increasingly liquid. But greater liquidity in a share – commonly regarded as a benefit for investors – can also prove dangerous

In mid-November, one of AIM's most frequently traded companies, BioProgress, saw its shares fall by a fifth to 67p, exacerbated by trading in contracts for difference. This happened just after the drug delivery group's chief executive Graham Hind cancelled a media interview because he was ill.

Private investors jumped to dire conclusions that bad news might be coming and 24 million shares – a fifth of the total – changed hands in one session alone. A day later the group issued a trading update, warning of a full year £7 million loss, reflecting £3.3 million of one-off costs relating to a patent dispute and weaker trading at acquisition BioTec Films.

Although the shares recovered the following day to 75p, again on heavy volume, this shows how trading can be equally volatile in shares that are very liquid as in those that are illiquid. Such situations are best left to market makers to profit from. It could be argued that investors have greater chances of prospering by avoiding the extremes and choosing stocks with steadier trading volumes.

How liquid is AIM?

Across the market, in the year to October the average number of share bargains conducted daily was 6,397, almost double last year's levels and more than three times that of 2002. However, this is still short of levels at the height of the dot com boom in 2000, when each AIM share attracted more than 15 trades a day on average.

Over the whole of 2004 shares worth £14.16 billion have been traded on AIM. That represents just over half the value of the entire market. The heaviest traded sector this year remains resources, accounting for £4.78 billion worth of bargains.

One reason for this enhanced liquidity is that all but 20 AIM shares now have two or more market makers. This means they can be traded on the Stock Exchange's automated quote system SEAQ.

Nevertheless the latest AIM monthly statistics show that 90 AIM securities did not trade at all during October and roughly 40 per cent traded on average only once a day.

At the other extreme, 21 stocks enjoyed extremely heavy volume, with over 1,000 bargains completed during the month. And the two most frequently traded shares – BioProgress and Petrel Resources – were the only two companies to notch up trading turnover worth more than their respective market values by the end of the month!

Trading strategies

Petrel, which is exploring for oil in Iraq, has seen its shares shoot up more than sevenfold from 14p to 104.5p since 1 January. This has happened on speculation it might still benefit, in a future democratic Iraq, from oil contracts agreed under Saddam Hussein's regime.

Online clothes retailer ASOS has experienced another meteoric rise, shooting up 19 times from just 4.5p to 85.5p, after breaking into profit. The group was the 12th heaviest traded company in October.

A year ago, the shares of both these concerns were barely noticed. But buying then would have proved preferable to taking part in the scramble to snap up stock, at higher prices, now.

Moving in the opposite direction has been computer games developer Warthog, off 97 per cent to 0.35p over the year after industry changes forced the company to adjust its strategy drastically.

Despite this the group was the tenth most popular share in October, as the stock got off its deathbed, on the back of financing measures, to perk up fourfold to 1.57p. The group has sold the freehold of its head office and most of its remaining business to a Nasdaq-listed concern.

So, if there is vastly increased trading in a stock you own, or you are thinking of buying, prepare for a roller-coaster ahead. This renewed interest might mean risks are about to increase as well.