How to Start an Investment Club

By eHow Personal Finance Editor

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Starting an investment club is a fun, easy way to learn about investing. It is risky and exciting as you and co-members either increase or decrease your financial holdings by pooling funds and investing together on a regular basis. It can also be a fun excuse for a regular social gathering or a way to educate kids about finance.

Instructions

Difficulty: Easy

Organizing an Investment Group

Step1
Introduce the idea of forming an investment club to people you know who have expressed interest in following the stock or bond markets.
Step2
Agree on common goals for the group. Members who are involved for social or educational reasons may not mix well with serious investors.
Step3
Agree on the level of financial commitment members will make. A large monthly contribution may eliminate members over the long run. Small investments may frustrate investors who want to commit large amounts of cash in hopes of seeing a larger return.

Write an Operating Agreement

Step1
Write an agreement for how the group will be conducted. A bank or brokerage firm will require Articles of Incorporation or a Partnership Agreement when setting up an account.
Step2
Develop the appropriate type of agreement based on how you want to file for taxes at year end.
Step3
Record when and how often the group will meet.
Step4
List the necessary roles for operating the group such as a president to conduct meetings, secretary to keep notes, treasurer to deposit dues and an investor to place buy and sell orders and monitor investments.
Step5
Record an initial membership contribution and ongoing dues.
Step6
Determine how the club will manage payouts, divestiture or dissolution.
Step7
List requirements for gaining new members once the club has started.
Step8
Obtain signatures from all members on the agreement.

Conduct Investment Club Meetings

Step1
Appoint individuals to roles outlined in the operating agreement.
Step2
Open a brokerage or bank account and either subscribe to an online investment service or obtain a broker.
Step3
Summarize the preceding meeting and an agenda for the current meeting.
Step4
Review club financials. Include overall gains or losses, individual investment progress and cash balance available for investment.
Step5
Present investment ideas and determine if the club wants to buy, sell or further research an idea.
Step6
Close each meeting with the agenda, date, time and place for the next meeting.

Tips & Warnings

  • Read about the experiences of other investment groups and make sure all members understand the risks before committing.
  • Be careful when forming an investment group with friends. Financial difficulty can strain relationships.
  • Operating as a Limited Partnership is the simplest way to represent an investment group. You can apply for a taxpayer ID by calling the IRS.
  • If operating as a Limited Partnership, each member will attach a schedule K to his personal income tax filing. The schedules can be prepared by a single CPA and distributed to each member.
  • Find an example of a Partnership Agreement or Articles of Incorporation to guide development of your agreement.
  • Limit the amount of time each member will hold a particular role. This will diversify and enhance the experience of individual members and diminish the chance for club mutiny.
  • Make sure the group agrees to all parts of the operating agreement to avoid disappointment down the road.
  • Using online trading services make research, trading and tracking very simple. Check out Web sites for E-Trade, Merrill Lynch or Charles Schwab (see Resources).
  • If the group is small, make sure each member reviews a different magazine, Web site or newspaper for investment ideas.
  • Agree on a sell price for an investment and enter the order online or with your broker to avoid missing a sell opportunity between meetings.
  • Arrange expert presentations to educate members. Choose a stock expert one week and a bond expert the next.
  • Some professional investment guides are expensive and may not be financially prudent for your club.
  • Make sure you understand how online investments work. If a stock price surges during the day and then falls, make sure the program allows you to sell during the day or you may be stuck with the closing price.
  • Only invest what you can afford to lose.

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eHow Article:  How to Start an Investment Club

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