Trading volumes on AIM, a sub-market of the London Stock Exchange that allows smaller companies to raise capital with fewer regulations, are at record highs and planned regulatory changes could soon give them another boost.

Since mid-May, the 61.8 billion pound FTSE AIM index <.FTAI> - once known as the Alternative Investment Market - has outperformed the main FTSE 100 <.FTSE> index by 1 percentage point.

In the previous two years, AIM had lost nearly a quarter of its value against its blue-chip sibling as the heavy presence of many early-stage resources firms, which often require repeated capital injections, deterred investors.

An average of around 1 billion shares is now traded daily and traders see turnover rising further in coming months thanks to government initiatives aimed at spurring investment in growing businesses.

Britain is set to enable individual savings accounts (ISAs) - popular tax-free products used by ordinary citizens - to hold AIM stocks from later this year, and will abolish stamp duty on shares traded on AIM next year.

While only part of the approximately 1.1 billion pounds a year committed to stocks and shares ISAs will make its way into AIM, even a little buying can have a big impact on prices of these largely illiquid stocks.

"We expect to see a marked increase in volumes," said Mike McCudden, head of derivatives at Interactive Investor, whose survey of clients showed some 76 percent would invest in AIM stocks should they be made available through an ISA.

The easier listing rules have seen a revival of flotations on AIM while placements on the main market have dwindled. Since the market ground to a halt at the start of 2009, flotations on the junior market have recovered to between one and 15 per quarter, according to Thomson Reuters data.

Some have met with an impressive take-up. Shares in software firm WANdisco (>> Wandisco PLC) are worth five times their 2012 launch price while those in Blur (>> Blur (Group) PLC), an online marketplace operator for firms tendering for business, have nearly tripled since its flotation last year.

RESILIENT

AIM-listed firms have proved more resilient to a recent equity market sell-off sparked by worries over the withdrawal of central bank stimulus, and could retain this edge as more mature companies struggle for growth.

While the FTSE 100 <.FTSE> index slid some 12 percent from its peak in May to a June trough, the AIM index fell only around 7 percent.

"When world growth isn't there, (AIM stocks) have the advantage that they can organically double," said Gervais Williams, managing director at Miton Group, whose top picks include consumer financial services business Fairpoint (>> Fairpoint Group Plc).

The shifting landscape of the index means it offers more such opportunities than in the past, and fewer high-risk exploration companies. Basic resources presently account for around 11 percent of AIM, down from about 33 percent in January 2011, and sit alongside a sizeable selection of technology, industrial and retail companies, according to FTSE.

Shrewd stock pickers could have cashed in this year by investing in cloud-based telephony firm Coms (>> Coms plc), whose shares are worth 11 times their value at the start of 2013, or security company Pentagon Protection , whose share price has quadrupled, both on contract wins.

"There are some individual good growth businesses there and if people think they understand those well and understand the business models there is the potential," said Colin Mclean, SVM Asset Management managing director, whose holdings include AIM-listed software provider Escher (>> Escher Group Holdings plc).

(Editing by Toni Vorobyova and Catherine Evans)

By Tricia Wright