Starting an investment club is a fun, easy way to learn about investing. It is risky and exciting as you and co-members either increase or decrease your financial holdings by pooling funds and investing together on a regular basis. It can also be a fun excuse for a regular social gathering or a way to educate kids about finance.
Introduce
the idea of forming an investment club to people you know who have expressed
interest in following the stock or bond markets.
Agree
on common goals for the group. Members who are involved for social or
educational reasons may not mix well with serious investors.
Agree
on the level of financial commitment members will make. A large monthly
contribution may eliminate members over the long run. Small investments may
frustrate investors who want to commit large amounts of cash in hopes of
seeing a larger return.
Write an Operating
Agreement
Write
an agreement for how the group will be conducted. A bank or brokerage firm
will require Articles of Incorporation or a Partnership Agreement when setting
up an account.
Develop
the appropriate type of agreement based on how you want to file for taxes at
year end.
Record
when and how often the group will meet.
List
the necessary roles for operating the group such as a president to conduct
meetings, secretary to keep notes, treasurer to deposit dues and an investor
to place buy and sell orders and monitor investments.
Record
an initial membership contribution and ongoing dues.
Determine
how the club will manage payouts, divestiture or dissolution.
List
requirements for gaining new members once the club has started.
Obtain
signatures from all members on the agreement.
Conduct Investment Club
Meetings
Appoint
individuals to roles outlined in the operating agreement.
Open
a brokerage or bank account and either subscribe to an online investment
service or obtain a broker.
Summarise
the preceding meeting and an agenda for the current meeting.
Review
club financials. Include overall gains or losses, individual investment
progress and cash balance available for investment.
Present
investment ideas and determine if the club wants to buy, sell or further
research an idea.
Close
each meeting with the agenda, date, time and place for the next meeting.
Tips & Warnings
- Read about the experiences of other investment groups and make sure all members
understand the risks before committing.
- Be careful when forming an investment group with friends. Financial difficulty can strain
relationships.
- Operating as a Limited Partnership is the simplest way to represent an investment group.
- Find an example of a Partnership Agreement or Articles of Incorporation to guide development of your agreement.
- Limit the amount of time each member will hold a particular role. This will diversify and
enhance the experience of individual members and diminish the chance for club mutiny.
- Make sure the group agrees to all parts of the operating agreement to avoid disappointment down the road.
- Using online trading services make research, trading and tracking very simple. Check
out Web sites for E-Trade, Merrill Lynch or Charles Schwab (see Resources).
- If the group is small, make sure each member reviews a different magazine, Web site or
newspaper for investment ideas.
- Agree on a sell price for an investment and enter the order online or with your broker to
avoid missing a sell opportunity between meetings.
- Arrange expert presentations to educate members. Choose a stock expert one week and a bond expert the next.
- Some professional investment guides are expensive and may not be financially prudent for your club.
- Make sure you understand how online investments work. If a stock price surges during
the day and then falls, make sure the program allows you to sell during the day or you may be stuck with the closing price.
- Only invest what you can afford to lose.
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