How to Start an Investment Club

How to Start an Investment Club.

If you're interested in investing but don't want to go at it alone, you can join an investment club or even start one of your own. An investment club consists of members who study stocks, bonds and other investments. The goal is to have each member take an industry and report to the group why they think it is a great investment. Knowledge is power, and wisdom from many helps assure success. Many times they will pool their money together in order to make joint investment decisions. It's a great way to give and get wisdom. Working with others will help you and others make intelligent investment decisions.

Part 1 Getting Your Club Together.
1. Find potential members for your club. They can be local, so you can meet in person, or they can live far away, and you can meet online. Aim for a club with 10 to 15 members, but anything from six to 20 is workable. When you have fewer people you might have trouble getting enough funds together to invest (some investments favor the larger investor). However, with a large group, both maintaining high-quality discussions and finding a place to meet become concerns.
Spread the word. Tell family, friends, and co-workers about your club-in-the-making. Put together a flyer describing what you have in mind, and pass it out, post it on message boards, send it through e-mail, etc.
2. Hold a preliminary meeting. Get together with the people who are interested, provide snacks and refreshments, and discuss the formation of a club.
Define goals. Are people more interested in the club for its educational value, or for the financial returns? Are they interested in short-term or long-term investing? (Most investment clubs use a buy-and-hold strategy.) Will your members share a general investing philosophy and approach?
Determine how much each member can contribute financially.
If people make different contributions, their returns should be proportional.
You can either pool your investment funds and invest together (a common practice) or invest through individual accounts (self-directed).
Consider starting your club through BetterInvesting.org, an organization that can provide education, support, and online tools and resources for your club.
Determine if your club needs to register with the SEC. You can find more information on the U.S. Securities and Exchange Commission at: https://www.sec.gov/investor/pubs/invclub.htm
3. Gauge member interest level. In other words, decide whether you really want to invest with these people. An investment club will involve significant risk for those involved. The risks, and consequently the rewards, are shared among all members. This means that everyone involved should be equally interested and participate similarly. Be on the lookout for red flags among your potential members. For example, consider carefully members that might.
4. Hold an organizational meeting to iron out the details. Have another get-together with the people who are still interested to discuss and implement the club's policy and organization. The first step should be to decide on an official name for your group. Next you'll want to decide when and where to meet (a living room, library, church, or coffeehouse, depending on the size of the group). Meetings should last an hour or two. After defining these basic rules, consider also doing the following.
Defining and appointing roles within the club (president, secretary, treasurer, investor). What are their responsibilities? The terms should be one or two years, and the treasurer should have an assistant who can move up later.
Writing out how the club will manage payouts, divestiture (reducing assets or investments), or dissolution.
Laying out the policies on gaining new members and figuring out what happens when a member wants to leave the club.
5. File the necessary paperwork. In order to pool your money and invest together, you will need to incorporate your investment club into what is known as a general partnership. You will have to write out the rules of this partnership and its operation and have each member sign it once you all agree.
You should also write a club operating agreement. This would outline all the policies discussed in the previous meeting and should be signed by everyone in the group (as well as others who may join later). There are sample contracts and agreements available online and in books.
To pay taxes, you also have to apply with the IRS for an Employer Identification Number (EIN) and file a "Certificate of Conducting Business as Partners" form with a local jurisdiction (such as a Secretary of State office). Contact your local jurisdiction (city, county, or state) for more information.

Part 2 Investing with Your Club
1. Open a brokerage account or bank account. Most clubs start with both a checking and a brokerage account. Choose a broker who suits your needs (full-service, discount, or online). A full-service broker will provide advice and may attend a few meetings, while a discount or online broker will leave you to your own devices. Many investment clubs end up choosing the latter.
2. Develop an educational agenda. In most cases, investment clubs are formed by people who are still learning about investing. Not everyone is on the same page in terms of his knowledge base. Ask each member what big Question : s they have about investing. Having them submit Question : s anonymously is a good option. Choose the topics you feel should be addressed as a group. Make a "syllabus" and decide who will be doing the research and presenting the topic to the group.
You may also wish to provide a list of good, reliable sources for research. In general, you should stick to reputable financial news services and online investing encyclopedias.
3. Research potential first investments. After a period of time, when contributions to the club have been made by group members, you're ready to start looking at first investments. Have each club member research potential asset purchases like stocks, mutual funds, or investment properties and defend her choices with research. Then, you can have the group vote on their favorite choices and determine how much money to allocate to each.
Remember to keep some of your initial money uninvested in case the market presents an opportunity.
4. Invest as a group. Finalize your choices for your first investment and take the plunge. As your club continues operating, evaluate new and old investments during your regular meetings. These will typically be held once a month, although market conditions may dictate more frequent gatherings. In these meetings you should also:
Review club finances (overall gains or losses, individual investment progress and cash balance available for investment).
Make sure you have designated a single, trustworthy member who has the authority to buy and sell on behalf of the club.
5. Have fun. Celebrate your victories and commiserate your losses. This is one of the biggest reasons people join investment clubs. You could even set aside some of your gains for group outings or events. The idea is to keep everyone entertained and involved in the group so that they keep contributing funds each month and don't get bored over time.

Community Q&A.

Question : Can a group of my friends start a club where we focus on trading Futures contracts?
Answer : Yes, you can focus on any sort of investment you like. Find a full-service broker who's very experienced in that area unless you know what you're doing, in which case you can use an online brokerage.
Question : I have an existing Investment Club of 20 years and now our broker is asking for an updated membership list. We have had numerous changes in membership that we have not made officially through our by-laws. What should we do?
Answer : It is not necessary for your by-laws to list your members by name. It's a good idea, however, to keep a current membership list. Let it include identifying information such as Social Security numbers. Share that list with your broker. He may be required by law to have that information on file. If your club has a secretary or treasurer, it can be that person's responsibility to keep your membership list current along with all individual contributions and earnings.
Question : Can whole life insurance be a viable investment tool for investment clubs?
Answer : No. Life insurance could potentially be a decent investment for an individual but not for a group.
Question : We are forming an investment club for stocks, real estate, etc. How do we register and what type of account do we need?
Answer : "Registration" is not necessary. You are simply private parties making private investments. If you'll be making group purchases, you'll want a checking account for the club, as well as trading accounts with one or more brokerages. (You don't have to work exclusively with one broker.)
Question : Why, when we leave the investment club, do we only get 95% of our money?
Answer : Read the by-laws of your club. There may be a provision stating that the club retains 5% of your money for maintenance purposes.
Question : In this era where investing in stocks is highly risky, what other investment windows would you advise?
Answer : Bonds are usually considered to be less risky than stocks. You can invest in certain mutual funds that own an array of bonds. Some mutual funds invest mainly in stocks, and that's a way of diversifying your stock investment and taking on less risk. Money-market instruments such as certificates of deposit (CDs) are safe investments, but they don't pay very much interest. Unfortunately, that's usually the case: the safer the investment, the less it's likely to pay you.
Question : There are six of us. We want to pull our funds together each month and ultimately invest it. Would we need to register our group as a limited partnership the state's secretary of state office?
Answer : Probably a general partnership. Re-read Part 1, Step 5 above.
Question : Are we limited as a group to investing in stocks, bonds and real estate? Can we also invest in things like buying and selling cars, boats, auctioned-off storage units, estate sales, etc.?
Answer : A club is free to choose its own investments without restrictions.
Question : How should the profits be shared among the club members?
Answer : Profits are commonly shared in direct proportion to the amount of each member's investment, but you can agree on other arrangements if you like, such as recognizing certain members' investing prowess or willingness to do administrative work on the club's behalf.

Tips.

Don't invest immediately. Give the group a couple of months to deposit money. This will weed out those who aren't really committed to the club or who can't afford it.
When an investment goes wrong, keep your pointing finger to yourself. Use the experience to learn what not to do. Go back to the drawing board and change things if need be.
Trust has to be established for the club to be effective.
Limit investments to cash with no leverage. If margin accounts are used, every partner may be liable for the full debt.

Warnings.

Make sure that everyone understands that they might not make money and could actually lose money. Not all investments are profitable. If they were, everyone would be doing it.
Proper planning, a supportive group, and an understanding leader are vital in promoting cohesion and optimism within the group
Some members may be tempted to embezzle funds. This is why having an operating agreement and ironing out the details is important. So is your choice of club officers.
Be ready for the fact that your group will experience emotional highs and lows in the course of investing their hard-earned money.