How to Start an Investment Club
Investing in the stock market can seem a daunting proposition. But don’t sweat it. You’re in good company. Thousands upon thousands of investment clubs operate throughout the United States and around the world. What’s more, investing via an investment club isn’t a new idea. The investment club format has been around for decades.
So, you’re comfortable with the idea, but you’re not sure where to start. How do you know what stocks to buy? And when or if to sell? Will you lose everything in a market downturn? How do you find a brokerage who will handle your account?
An investment club is the ideal place to find the answers to these questions. You already know that an investment club is simply a group of people who have gotten together not only for the purposes of investing money in a common portfolio, but -- perhaps more importantly -- learning how to invest their money.
How Does an Investment Club Work?
The rules are pretty simple, and can be modified in many ways. An investment club is typically a group of 10-15 people -- sometimes more, sometimes less -- usually organized as a legal partnership (primarily for tax purposes). The club has officers, and each member is expected to participate by:
- Attending each monthly meeting;
- Making a minimum monthly contribution, which is usually in the ballpark of $50-$100. (Each investment club sets its own monthly minimums);
- Researching and following the progress of a stock or family of stocks that the club has bought or is considering for purchase.
The club's portfolio is determined by its members. Usually, a designated member deals with the club's brokerage firm to execute buy and sell orders. The value of each member's share is determined by his/her capital contributions to the club and the total value of the club's portfolio. Luckily, software tools can do pretty much everything for you.
ICLUBcentral offers the myICLUB.com online club accounting and management tools suite, which handles all of the powerful accounting tasks on a web-based platform than any member can access from anywhere in the world. myICLUB.com also includes private club message boards, a calendar, online voting tools, file sharing and storage, more than 45 reports and graphs, and much more. (A free 45-day no-obligation trial is available.)
At a suggested minimum monthly contribution level of $50 or $100, almost anyone can participate in an investment club. The only requirements are a willingness to work and participate, and the ability to get along with the other members of the club. As a legal partnership, you should approach the idea of a club as going into business with 15 people, and all 15 have to be people you trust and people who will trust you in return.
A Long-term Proposition
Most clubs have two stated goals: First, to learn about investing in stocks; and second, to make a return on their investments (and that's the suggested order of their priority, as well). However, the liquidation value (if you said, "get me out of this club and give me my money back") of most clubs will often be less than the capital contributions of its members during the first year or two. That is to say, investing in the stock market is a long-term proposition, and you may only see your contribution increase in value after the first year or so of a club's operation.
You should expect to make a long-term commitment, and the partners may decide to include a clause that addresses the early withdrawal of funds (other than in the case of unusual circumstances).
Most club members also eventually begin their own individual portfolios, armed with the knowledge and skills they gain from belonging to the club.
What About the Legal Ramifications?
Are investment clubs "legal?" Absolutely!
As outlined in ICLUBcentral's article, the Top Three Steps to Starting an Investment Club, most clubs have a partnership agreement that describes their formation. Many also have by-laws that dictate how the club will be run.
In terms of tax liability, a partnership as an entity is usually not liable for taxes on the investment gain or loss. Instead, each individual member is responsible for reporting his/her share in the partnership, and the gain or loss involved. Gains, losses, expenses, and income are passed through to members in proportion to their share of ownership in the club, and then members report those applicable values on their personal tax returns.
How Much Will It Cost?
Besides partners' monthly capital contributions, club expenses (such as postage, memberships, and stationery) can also be incurred, but these are usually nominal since they are spread out to all members of the club.
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