How to Start an Investment Club

Ever thought of joining an investment club? If you haven’t, maybe you should; if you don’t know any, you can start your own. Investment clubs are a great educational and social medium. If you are interested in learning more about investment and understanding the investment world, joining an investment club can be of great value. If you know an investment club near you, I suggest contacting them and attending a couple of meetings to get to know the club and then joining.

How Do Investment Clubs Work?

Investment clubs function very similarly to any other club (book clubs, chess clubs, etc.). Usually it is registered as a partnership and every member pays a registration fee as well as a monthly fee, these fees are first used to pay of any costs associate with running the club (bank fees, meeting rooms etc) and the remainder is invested.

There usually is a meeting once per month where members go over current investments, discuss current markets and opportunities, present an investment idea, and either decide to vote on it or do further research on it.

If it is decided to purchase or sell an investment, the person responsible for the execution will make the trade and inform everyone of the cost.

There is a partnership agreement, by-laws, and code of ethics that all members must obey. However, an investment club can be much less formal, with irregular meetings and no fixed investment amounts.

Benefits of an Investment Club

There are many benefits to an investment club, I will just highlight a few here.

1. Learning as a group

You will be part of a group of 5-15 members with everyone having a different level of knowledge, this can help everyone in understanding investments. You divide tasks among each other and research will be less overwhelming.

2. Spread investment risk

If you are new DIY-investor there is a great chance that you will loose some money at early stages until you learn more about the markets, this can be a very expensive lesson. However in an investment club the risk is much lower as it is shared with other members, you could learn much more with a lot less risk.

3. More resources

Being part of the club you can access and enjoy the resources available to the club, investment clubs generally will have invested in some educational and research tools and resources and as a member you can have access to it.

4. Networking

A great part of life is networking with like minded people and what better way to find like minded people than joining an investment club? These people can also help you in your personal situations and function as a “counseling group” during bad times like these. Many times we have had members come in at meetings and discuss how they don’t understand many of there investments, we took time to discuss them and help make decision regarding it’s appropriateness they always felt much better when leaving.

How to Start an Investment Club

About a year ago, I had many friends and clients who wanted to understand more about the markets, but I could not find an investment club, so I decided to start one. There is a lot of paper work involved in getting it going, but we finally got things going in about 4 months. Since many of our members were students we decided to start small, initial fee of $150 and monthly fee of $40.

So far it has been fairly informative and many members have learned quite a bit about investments, several have opened their own discount broker accounts and started investing small amounts.

If you wish to join an investment club but are unable to find one, I suggest you start your own. Starting an investment club does not have to be very complicated and you do not need dozens of members, just a few are sufficient.

Here is how you can start your own investment club in a few simple steps:

Find Members

If you’re starting an investment club, you’ll obviously need members, so go out and look for them. Start asking friends, co-workers, and maybe family members if they would be interested. You can also use social networking sites such as Facebook and Twitter to solicit members. Just make sure they are serious, and you feel comfortable working with them. Often, most people agree and illustrate interest, but after a few months, they drop out, so only accept serious and committed members.

Formal vs. Informal Structure

Once you have gathered sufficient members you all need to decide on the structure of the club. Do you want it to be formal or informal? If informal, how will you handle the finances? If formal, how will you register it? Both have pros and cons, personally I find formalizing it works often better in the long run but it has some costs associated with it. If you do decide to formalize it you need to decide on the structure (partnership, corporation etc).

Agreements, By-Laws & Other Paperwork

After you have decided on the format and on an appropriate name for the club, it’s time to draw up some paperwork. If you have chosen to do it as a partnership you will need partnership agreements, by-laws and maybe code of ethics. Everyone needs to agree on these documents as they will be your club’s constitution and will dictate what can and can not be done. All actions need to be approved according to these by-laws. These documents should also include your clubs investment objectives (e.g. 15% annualized return) and what types of investments you are acceptable (stocks, bonds, options, short etc).

Register as Partnership

After all documents are drawn and everyone agrees on them it’s time to make this a legal partnership and register it with your province or state. Once you register the club officially you will receive confirmation and will need this for the next few steps.

Open a Bank Account

Now you need to open a bank account which will have to be a business account registered under the club’s name as stated in the partnership agreement. You will need your signing officers present in order to open the account. Select an account and treasurer who are most suitable for your club’s needs.

Open Discount Brokerage Account

In order to purchase securities you will need to have a brokerage account, find a low cost discount brokerage account. Almost all discount brokerages now open accounts for investment clubs so make sure you ask before opening the account.

Make First Transaction

Now you are all set and ready to go and ready to purchase your first security. Often you will have stated the procedure for making transactions, ensure you are following the agreed on procedure for purchasing and selling securities. Most likely you will have a meeting and present a specific security and why it is a good buy for your club than you take a vote and if agreed your treasurer makes the purchase.

Often it takes several meetings and months before you can get to this stage, so patience is needed.

Hold Regular Meetings

Holding regular meetings is the most important part of an investment club; this is where the actual learning and knowledge sharing takes place. In you partnership agreement you should have indicated the frequency and purpose of meetings, the club secretary should send out email reminders a few days before the meeting takes place. Come to the meetings prepared to make the most of them, usually it’s a good idea to allot about half an hour for socialization so that it does not interrupt the meetings. During the meetings you discuss your current holdings and any changes needed, you can present new purchase ideas and/or discuss other relevant topics (e.g. learning about options and derivatives etc).

Documents:

Investment Club Partnership Agreement
Investment Club By-Laws
Investment Club Mission Statement
Investment Club Code of Ethics

Other Helpful Tools:

Iclub – We use Iclub for accounting and tracking purposes, it also provides other tools such as stock screener for an extra fee

Have Fun

Although the main purpose of an investment club often is education, fun is a big part of it.

I encourage everyone to find and join an investment club, even if you are a DIY investors you can benefit from and investment club. However if you can not find a club near you just recruit some people and start your own. Investment clubs can be as formal as you want it or as informal as you want it to be.

Are you a member of an investment club? If so, share your experience. What are your thoughts on investment clubs?