Many people want to begin trading or investing in the stock market but don’t know how or where to start. One method of investing is to form an investment club. Members of an investment club pool a set amount of funds each week or month, meet on a regular basis to research stocks and then as a group decide where to place their investment dollars.
How To Form An Investment Club
The membership may consist of people you know from church or your social network or maybe work colleagues. Your investment club can be made up of people from all walks of life and various income levels although frequently, an investment club comprises people of similar means and interests. The minimum number of members to form an effective investment group is usually four with a maximum of around ten. The essential ingredient in a successful investment club is that all members have an equal voice in the decision-making process.
Formation
After you’ve formed your group the first step is to decide a method of handling the funds and other administrative duties. If your club has a member with a financial background that person may elect to be treasurer. Otherwise, you may elect to have a rotating treasurer or secretary. This investment club member will handle the funds contributed by the club, open the bank account and set up an account with a broker.
The basic rules of the club can be set out in a letter that is given to all members. The rules should include:
- How much money each member will contribute and frequently contributions will be made.
- How the members of the group will present their investment choices to the group. How the decisions on investments are are to be reached.
- How the final investment decisions are to be made – a simple majority vote or unanimous vote.
Financial Decisions
The investment club should open a business account with a local bank or online bank. Depending on your jurisdiction you may need to register the business name and set up a partnership before opening a bank account. The investment club bank account should be set up with at least two signatories on the account. If you want all members to have the ability to access the account you can arrange that with your bank.
The next step is to set up an account with an online stockbroker. There are many to choose from and depending on their requirements you may need to open the account in the name of one or more members or the registered name of the club. Try and keep this aspect simple. You are not a big investment club. Keep the structure as simple as possible. If you need assistance ask the bank manager, stockbroker or seek independent legal advice.
All members can present their stock picks. Each presentation should include the financial information of the company and the last three years of prices and any other material relevant to the stock. If a technical approach is taken to investing a member may wish to include stock charts with technical indicators.
The Meetings
The investment club meetings should be conducted like any business meeting. You may all be friends and it does not need to be a formal affair, but the purpose of the meeting should be clear. Discuss previous investments and keep minutes of the event. Allow each member to present their opinions in an orderly fashion. Set aside an adequate amount of time for the presentation of new stock suggestions. Allow all members to ask questions of the presenter and state their opinion. The final vote should be noted. Finally decide on the date of the next meeting.
The Dog Investment
In the course of your investing it is inevitable that a member will pick a real dog for an investment. This is a normal part of investing or trading. The investment club should not worry about a bad choice, but as soon as it is apparent to all members that the stock is only going down, it is time to sell. The group can learn from its mistakes, but it is important to move on. Set objectives for the investment club at each meeting and always set a stop loss for every investment. By continuing to set goals and objectives the investment club remains vibrant.
Winding Up An Investment Club
At some point the investment club may decide to dissolve the group. This will require closing the broker account and bank account and dispersing funds to the members. If a large sum of money is involved the members may decide to ask for the assistance of a tax accountant. The accounting fee should be paid out of the accumulated funds before disbursements are made.
Starting an investment club is an enjoyable way to make long lasting friendships while making a few dollars in the process. To make sure you get the most out of your stock club download our free report on Starting Your Own Investment Club.
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