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By Richard J Hunter, Hargreaves Lansdown

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The spotlight is back on AIM as a war of words has broken out between the US Securities and Exchange Commission (referring to AIM as a "casino") and the London Stock Exchange (who replied that the US should stop "navel-gazing on the dubious premise that the US is 'the home of capitalism'").

Amidst all of this, what exactly is the fuss about?

The "Alternative Investment Market" was launched by the London Stock Exchange in June 1995 and has come to be seen by some as the jewel in the LSE crown, with its ability to attract a diversity of companies, both by country and by sector. Typically, it is a market which seeks to accommodate smaller, growing companies which are seeking fresh capital to expand their own business. In terms of the regulatory environment for AIM, its entry requirements are less onerous for those of joining the main market - for example, there is no minimum to the amount of shares which need to be in public hands (25% for the main market) and no prior trading record is required (3 years). This "lighter touch" regime has attracted companies from as far afield as Canada and Australia, China and Germany, representing sectors ranging from media to oil to biotechnology.

There are also certain tax advantages available from holding AIM shares, since, for tax purposes they are "qualifying unquoted companies". For example, due to tapering CGT relief, if the shares are held for two years the CGT rate falls from 40% to effectively 10% since they are classed as business assets. There are similar advantages surrounding Inheritance Tax, the Enterprise Investment Scheme (EIS) and separate treatment for Venture Capital Trusts (VCTs). You should consult your tax adviser who will be able to go through such benefits in detail subject, of course, to one major proviso - if the share is not making money, there is no point in holding it, tax benefit or not. The investment prospect should always come first, with the tax break then being the icing on the cake.

So far, so good. What other observations and differences surround this market, and what should investors be bearing in mind? Here are six to watch out for -

1. Although AIM is traditionally dominated by oil and mining stocks, when it comes to AIM, there is no such thing as a defensive share. While oil shares are traditionally seen as defensive in the FTSE 100, companies in the AIM market tend to operate in more niche areas of a particular sector and so by nature are subject to greater volatility - so what is defensive in the FTSE could be much higher risk in AIM. This is one of the key differences between investing in the two indices.

AIM investors should always make stock selection based on careful research into the company rather than following sectors; unlike the FTSE where you may feel comfortable going with 'blue chips' or 'defensives', on AIM, stock picking is all important. Even though, historically, 20% of all AIM companies double their value over a three year period, these can then be eroded over time - and so, as ever, diversity is key. A large number of sectors are represented on AIM - there is no need for all your eggs to be in one basket.

2. Consider your own attitude to risk - are you a low, medium or high risk taker? Because of the nature and volatility of some AIM stocks, and the fact that AIM tends to exaggerate the rises (or falls) of the wider market, they are on the whole considered to be higher risk. Even within AIM, the sectors that may seem defensive are still on the riskier side.

3. Consider market size - one of the reasons for the volatility is the lack of liquidity (ability to deal freely) in certain shares. Check the market size with your broker - if when you are buying the shares you are dealing "out of size" you may have to pay a premium - and the reverse will apply when you come to sell them

4. Ownership - ownership of the smaller companies tends to be held by management and directors, giving them a powerful incentive to achieve success which isn't always felt in larger firms. And because of the nature of smaller focussed firms, they would often not have the diversification - or other parts of the business to fall back on - if things go badly, as a larger conglomerate might. This being said, it could also be argued that this focus on one product or service is sometimes lacking at the largest firms which have so many balls to juggle.

5. Research - one of the beauties of AIM stocks is that because they tend to be smaller and newer, they are less well researched by the City than say FTSE stocks - there is always the possibility of unearthing a gem.

6. As a rule, shares on AIM tend to have a lower yield, their appeal being the potential for higher capital growth as we have discussed above. As such, some investors have been considering them as ideal for investment into their SIPP (Self Invested Personal Pension) due to the slightly different tax treatment which dividends receive in this wrapper.

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