Starting an Investment Club
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Forming the Investment Club
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When assembling the membership for your new investment club, try to limit the group to between six and 20 people. They don't have to be well-versed in investing; in fact, investment site The Motley Fool favors beginners, stating that "if you mix in some sophisticated investors with novices, the sophisticates can get bored or frustrated, and the novices can get intimidated." Members should also meet once or twice socially to see if member personalities gel.
It's important to also share the end goals of all investors in the group. People looking to make quick money in high-risk investments will invest differently than others trying to grow a retirement nest egg. One or two preliminary meetings will establish a commonality of purpose. Often, a club can diversify investments and please all members of the group.
Organizational Steps for Your Investment Club
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Next, decide on the basics of the club. Figure out source material to discuss and work from. Since you'll be investing based on the advice and knowledge from various books, articles and sources, it's imperative that everyone is on the same page and working from common theory.
Another important matter is money. To make the investment club work, each member will have to contribute a fixed sum to the pot every month. This amount should be something that's comfortable for everyone's income level. Members should only contribute money that they can afford to lose.
Take care of logistics, like meeting place, date and officers. The last is especially important, since the club will be establishing brokerage and bank accounts in the club's name. In charge of the money is the financial partner or treasurer "who deals with the brokerage, buys and sells stock, and keeps records of the club's holdings as well as each member's share." This should be a person who is responsible, organized and transparent with the books.
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The Legalities of an Investment Club
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There has to be a legally binding agreement between all members to make the club safe and legal for all involved. According to The Motley Fool, "You should realize that your $20 or $50 initial contributions will be growing into a significant pile of wealth. You'll need to have formal agreements in place to protect yourselves in case one member turns out to be a dastardly demon. Don't neglect this paperwork issue. For your club to be recognized as a legal entity, there are forms to fill out." Legal steps include forming a legal partnership for tax purposes (establishing an LLC, or limited liability company), and contracts entailing procedures in case of illness, death or theft. There should also be formal procedures for members who wish to cash out of the club.
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Resources
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