For young investors, one of the best ways to get started in the world of investing is by joining an investment club. This type of organization has actually been around for decades. The first investment club was reportedly established in Texas back in 1898. But just what is an investment club and why would this help a young investor?
An investment club is a group of people, typically numbering less than a hundred, who meet once a month to pool money and invest. The members of an investment club are usually friends, co-workers and acquaintances who have the same interest about investing. During these meetings, the members contribute a pre-agreed amount to put in the group’s account. They then research and report on potential companies to invest in during these meetings and then vote on the ones that they, as a group, will invest in. Minutes are kept in these meetings to serve as official records of the club.
In 1951 the National Association of Investors Corporation or NAIC established guidelines to help steer investment clubs in the right direction. Some of the suggestions to members include making regular investments no matter what the market conditions are, reinvesting all dividends and capital gains, purchasing stock in fast-growing firms and making diverse investments.
Aside from deciding on what firms to invest in, meetings in the club also serve as a way for members to learn more about investments. The successful clubs invite guest speakers—experienced investors—to speak on a topic and educate members. If the club is newly-formed, the meetings might teach members how to read an earnings report or a company’s balance sheet. At other times, the meeting might just cover new information that was gleaned from a recently-published book by a popular fund manager with a record for beating the benchmark.
Investment clubs are quite powerful organizations that make a difference in the market. In fact, investment clubs hold equities amounting to $180 billion in their portfolio, giving mutual funds a run for their money.
There are many different kinds of investment clubs that exist in the market today. They are named depending on the purpose of their investment.
1. Stock, mutual fund or bond investment clubs. These types of clubs invest in the vehicles in which they are named after. Before the financial crisis of 2008, there were many of these kinds of clubs in major cities. However, losses incurred during the crisis led to the disbanding of these clubs. The problem was that the members and the club owners themselves had little technical knowledge about various investment strategies and only relied on advertisements to decide which firms to invest in.
2. Real estate investment clubs. These clubs are basically formed to invest in real estate. They are able to benefit from the cash flow, tax benefits, appreciation of assets, instant equity and diversification from their real estate investments.
3. Business investment clubs or incubators. These clubs are established to acquire businesses that have been proven to generate cash and have good prospects for growth. These can include fast food chains, hotels and restaurants. However, some incubators are also formed to support startups or companies that have potential but no income history. These days, most of young firms that are being acquired by incubators are in the internet, mobile and technology space.
Some investment clubs are formed as a combination of two or more of the above types. They are called hybrid investment clubs.
Now that you know what an investment club is and the types of clubs available, you might want to ask why there is a need for you to join an investment club. There are a plethora of reasons why young investors should consider membership.
The first reason is if you are a new investor who is looking for a way to deepen your knowledge about the stock market. Certainly, you can always educate yourself through books and online sources. However, that knowledge you hold may not be enough considering the demands brought forth by your job and your family that will take away a lot of the time you have for research. The knowledge that others will share during investment club meetings will be invaluable as you continue your journey as an investor.
Another reason to consider joining is if you have around $20 to $50 a month to contribute to the club. This will allow you to make regular investments to the club that will help grow your portfolio as well.
You might also want to consider membership is if you have not really gotten around to learning about investing on your own and the sense of responsibility that this setup would provide will get you started. Those who are interested in investing but don’t have the discipline to arm themselves with the basic knowledge about the world of investments would do well to join an investment club.
Another reason to sign up for membership is if you enjoy the company of same-minded people who have a passion for stocks and investing. If your family or your friends turn away the moment you start talking about companies and their stock movements, you’ll find that members of an investment club will be more willing to engage a conversation with you on these topics.
Experienced investors may also consider forming or joining a club if they don’t have time to research on as many firms as they would like to put in their portfolio. In an investment club, a good number of people are assigned to research on and present a potential company for each monthly meeting. If there are ten people assigned to ten companies then you already have company information on ten firms without having to do all the research yourself.
If you’re already an experienced investor, joining a club is beneficial to get the perspectives of other people. Even if online casino you are already confident about how you pick your stocks, the thoughts of others may give you fresh perspective to help you arrive at even better investing decisions. More knowledgeable and well-respected investors who are invited in club meetings as guest speakers will also deepen your investing knowledge.
Joining an investment club comes with benefits and drawbacks. You should consider these carefully before deciding to sign up for one.
1. Investment clubs enable new investors to get their feet wet about the world of investments in a friendly atmosphere. A lot of young investors are scared about taking their first steps in the world of investing because of the seemingly complex world of stocks and the stock market. Investment clubs only require members to make small amounts as contributions per month and then they come up with a group consensus on which stocks to invest in. This simplifies the process for neophyte investors.
2. Investment clubs provide a continuous learning experience for all members. Through the monthly meetings and other scheduled events, investment clubs give members the knowledge they need to make sensible investment decisions. For many members, the knowledge learned in these meetings is also utilized in their own personal investments. When they are introduced to a promising stock in club meetings, they also buy these for their own personal portfolio.
3. Investment clubs widen your circle of friends and colleagues. In this increasingly connected world, it’s always good to have connections in various industries. The number of members in an investment club will give you more reach.
1. The members may not give all the information necessary when they research a potential investment and report on it. Since not all members have the technical training and experience, their research may miss out some very vital information. This is why you should also perform your own research and not just rely on the report given in investment club meetings.
2. Membership requires time and money. There will be monthly meetings that you need to attend and the fees that will be collected are a monthly requirement. If you are very busy, you may not have time to join the meetings or perform the research required of you. If you are on a tight budget, the contribution requirement may be a heavy burden to bear. Of course, the meetings are meant to educate and the money you contribute will come back to you in the form of returns but if the group makes a losing investment, then you can’t expect to have good gains.
3. Hurt feelings can result among members from bad investments. Since a group consensus is needed before an investment is made, a decision can lead to hurt feelings and sometimes, even animosity, among members. This is particularly true if a particular investment was hotly debated or contested when it was presented. Club members will just have to be mature enough to realize that failed investments are part of stock investing.
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