How to Start an Investment Club

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

Organizing an Investment Group

1. Introduce the idea of forming an investment club to people you know who have expressed interest in following the stock or bond markets.

2. Agree on common goals for the group. Members who are involved for social or educational reasons may not mix well with serious investors.

3. 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

1. 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.

2. Develop the appropriate type of agreement based on how you want to file for taxes at year end.

3. Record when and how often the group will meet.

4. 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.

5. Record an initial membership contribution and ongoing dues.

6. Determine how the club will manage payouts, divestiture or dissolution.

7. List requirements for gaining new members once the club has started.

8. Obtain signatures from all members on the agreement.

Conduct Investment Club Meetings

1. Appoint individuals to roles outlined in the operating agreement.

2. Open a brokerage or bank account and either subscribe to an online investment service or obtain a broker.

3. Summarize the preceding meeting and an agenda for the current meeting.

4. Review club financials. Include overall gains or losses, individual investment progress and cash balance available for investment.

5. Present investment ideas and determine if the club wants to buy, sell or further research an idea.

6. 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.

• 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.

• 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.

• Be careful when forming an investment group with friends. Financial difficulty can strain relationships.

• Make sure the group agrees to all parts of the operating agreement to avoid disappointment down the road.

• 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.