In a previous report, we gave the definition of an investment club, reasons to join an investment club and the benefits of drawbacks that come with membership. If you believe that an investment club is right for you, then you might want to form one yourself. In this report, we will tackle how you can actually start and operate your own club.
Before we start an investment club, it’s important to have an idea of how your club will operate under the law. Generally, investment clubs are established as general partnerships by two or more persons. The partners of this unincorporated firm create the investment club by agreement and they are all personally liable for legal actions and debts that the club will incur.
However, clubs may also be created as limited liability companies, limited liability partnerships, corporations or even as a sole proprietorship. Since there are different kinds of reporting requirements to the US Securities and Exchange Commission depending on how your club is structured, it is generally a good idea to consult with a lawyer regarding these matters. Usually, if your club has less than a hundred members, there are no reporting requirements but if membership goes over 100, it will be reclassified as an investment group and will be subject to other kinds of requirements. Again, make sure that you talk to a lawyer knowledgeable about these issues so you don’t run afoul with the law.
Since you will only be starting with very few members, there’s a good possibility that you won’t need legal advice. Just make sure that you do the necessary research first so you know the legalities behind forming an investment club. One important resource is the NAIC or the National Association of Investors Corporation who will give you samples and other important information about forming this type of organization.
Let’s get to the nitty-gritty part of investment club formation: The actual steps that will help you get together like-minded people for the purpose of educating yourself about investing and pooling funds to invest. Here is the step-by-step lowdown of forming an investment club:
1. Gather people. You don’t necessarily have to advertise. It’s best to broach the subject with your friends and/or colleagues to see if they might want to join. Let them invite others as well so you have a group of anywhere from ten to twenty members, give or take some. If you have too few people in your club, say three, you might not come up with sufficient funds to actually make a substantial investment. If there are too many, you might have a problem finding a meeting place to accommodate everyone and the quality of discussions may suffer.
A concern that some people may have is what if the investment club members only have very basic knowledge about investing or even none at all? Well, this need not be a bad thing these days since there are many online sources available for even the most novice participants. It’s a good thing to learn and grow in your knowledge together. If you feel that someone more knowledgeable than any of you should be brought in for reinforcement, you can always invite an experienced investor to speak in one of your meetings.
Be sure to give information about investment clubs in general and your proposed club to those you invite. After all, you want them to actually think about the idea so they can seriously consider joining. You don’t want them coming to your first meeting and then after knowing what it really is, not proceed with membership. That would be a waste of both their time and yours.
2. Set a preliminary meeting. The purpose of this meeting is to gauge how much you have in common, decide on how the club will be run and if they really want to proceed with their membership. Get everyone’s ideas so you know where they stand.
In this meeting, you want to check if everyone is on the same wavelength as far as your investing goals are concerned. If everyone says they are in favor of growing their nest egg slowly then that’s a good thing. However, if one or two say they want to make a quick buck and then get out, you might have to enlighten them about it so they can decide if a membership will be worth it for them. It’s important to have similar goals so that your club will operate smoothly and meetings won’t be divisive.
During that meeting, it’s also important to agree on your monthly contributions. Minimums can go as low as $25, depending on what is agreed upon by the group. Make sure that everyone is comfortable with the contributions. You should also see to it that all members understand that the monthly contributions to the investment club should only comprise a portion of their investments. They should have their own savings and personal portfolio as well.
3. Formulate a general investing approach that you will employ for your club. In the first or second meeting of your club, make sure that you come to terms on the investing philosophy that you want your club to follow. Whether it’s a buy and hold approach or technical analysis or any other sophisticated investing philosophy, the important thing is to have a consensus.
You should also recommend and ask for recommendations from members on the tools and books that should serve as required reading for everyone so you are all on the same page. Paul Lynch’s “One Up On Wall Street” and “Beating the Street” has been recommended reading for many investors. Suggest magazines and websites that everyone should refer to.
4. Decide on a name, a meeting place and meeting schedule for your investment club. How do you want to call your club? Solicit suggestions from everyone and agree on the name that best fits your group. You can vote on it so that you get the decision of the majority.
It’s also important to meet regularly. Most investment clubs set a monthly meeting schedule. Set the meeting place and the meeting time. As far as where the meeting is going to be held, there are a lot of options. You can offer your living room if it has sufficient space or perhaps you can hold it at a coffeehouse. Also, you should not only decide on the time for the meeting but for the length as well. People are busy and they want to know how much time they need to allocate for these meetings.
On the subject of meetings, it’s important to make people look forward to them. One way to engage members is to make sure that snacks will be served. Of course, you will have to decide as a group on how snacks are going to be paid for or if they want to have food in the meetings at all (most likely, everyone will want them). You can get money from your monthly contributions or you can ask all members to take turns in giving snacks.
5. Agree on the legal and operational aspects of your club in succeeding meetings. As said above, you can get a guide from the NAIC or the National Association of Investors Corporation which will give you manuals and sample agreements to help you operate your club. You might not think that there is a need for these but if you have monthly contributions of even just $25 from 10 members that will grow substantially later on. Formal contracts are necessary to protect everyone. Besides there are also legal forms you need to fill out so that your club will be duly recognized by law.
You will need to elect officers early on in your club’s life. You should also clarify what the responsibilities of each one will be so they know how to run the organization. For example, the president sets the meetings and plans activities while a treasurer is tasked with buying and selling stock and keeping records. Clubs also need a vice president, secretary and sometimes an education officer.
You should also decide on the broker who will help your investment club facilitate trades. Full-service brokers give guidance and research on your club’s investments but they can be expensive. If you are all novices, it might be a good idea to stick to a full-service broker if you can afford it. Otherwise, discount brokers are the best choice. Discount brokers only facilitate trades and maybe a little research but the advantage is they don’t charge a premium for their services.
Finally, don’t forget to leave fun out of your meetings. An investment club is a good way to widen your circle of friends and support group. Although meetings should be held to discuss investments and learn more about stocks, they may also be used as a way to share experiences and anecdotes and funny stories that you have experienced at work or even at home. When meetings are light and interesting, members are more inclined to join them. Regular attendance and a common goal will contribute to the success of your investment club.
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