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An investment club is a group of people who pool funds to purchase stocks, bonds and other securities. It can be a great way to learn about financial markets, make new friends and maybe even make some money. Read on to learn more.
How Investment Clubs Work
The goal of an investment club (and of any investment) is to purchase stocks or other securities that will gain value over time. To that end, investment club members research potential investment opportunities, recommend purchases to one another and decide as a group where to put their money.
Like other types of clubs, investment clubs may have an organized structure with officers, protocols for decision making and assignment of tasks, and regular meetings. Following research and discussion, the decision for how to use the group's funds is typically reached by vote.
Investment clubs operate through by-laws, established by mutual agreement of founding members. They govern such matters as:
- How much money each member must contribute to the investment pool at each meeting
- Whether or not there is a limit on the number of club members
- The initial buy-in amount required of new members
- Procedures for cashing out or selling a group member's share to a newcomer when a member can no longer participate in the group
- Investment policies
- Duties and terms of office for club officers and procedures for electing them
Most clubs operate as legal entities such as general partnerships or limited liability corporations (LLCs). Partnerships must file annual financial statements and tax returns—and may be subject to taxes on financial gains reaped when securities are sold. Officers are typically responsible for handling these matters, but over time all members may become officers, so all should be willing to shoulder these responsibilities.
Investment clubs can vary in size and scope. Many have monthly dues under $100, but larger sums are possible. Some limit their investments to specific market sectors such as technology, manufacturing or green energy. Groups may trade stocks frequently or accumulate chosen securities over the course of many years. If you have a particular investment approach or style, you may be able to find a club that mirrors it.
When the time comes to reap their investment gains (or walk away from losses), clubs may cash out and, after paying applicable taxes, distribute the proceeds among members. If individual members choose to leave the club, they may cash out or sell their shares according to procedures spelled out in club by-laws.
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Socializing for Fun and Profit
Each club sets its own agenda and meeting frequency, but monthly gatherings are common, and meetings typically include the following:
- Collection of dues: Each member contributes a set amount to add to the club's investment pool.
- Review and discussion of portfolio performance: How far up (or down) is the value of the club's holdings? Which securities are performing well? Is it time to cut underperformers loose?
- Reports on investment research: Members typically take turns, individually or in groups, researching companies or funds in specific industries. Each meeting may include a presentation and discussion of one of these inquiries. Presentations may include an overview of competitors in the sector and a case for or against investing in one or more securities.
- Motions and votes on any buy/sell recommendations
- An optional social hour or activity
Many investment clubs also invite outside guests to make informational presentations at meetings, along with or in lieu of members' research presentations. Visitors such as financial advisors and academic experts may address market trends, investment philosophies and other educational topics.
Is Joining an Investment Club Right for You?
If you're considering joining an investment club, here are some questions to consider before you take the plunge.
- Is your retirement savings in good shape? Before you divert money into an investment club, it's wise to make sure you've maximized contributions to your 401(k) or other retirement savings plan. It's possible your investment club will succeed beyond everyone's wishes, but you shouldn't count on it to fund your retirement.
- Can you afford to lose your investment? Investment clubs, like all other investments, come with risk. Losing everything may not be likely, but it's always a possibility, so don't invest what you can't afford to lose.
- Are you comfortable with group decisions? It's the nature of any democratic structure that, sooner or later, a vote will go against your wishes. It can have extra sting when your money is involved. In time, you may find group wisdom works in your favor, but the opposite may also prove true. If you're a person who wants full control over your money, you may be better off getting an investment account of your own and using it to do your own research and make investments.
- Does the social aspect appeal to you? If you want a better understanding of financial markets, or even just the world of business, the social aspect of an investment club could sharpen your curiosity and interest level. On the other hand, if you'd just as soon do your research in solitude or by consulting experts one-on-one—or if you're a sophisticated investor unwilling to collaborate with others who are less knowledgeable—a club probably isn't for you.
- Are you willing to commit? Clubs work best if all members are invested. If you're not willing to put in the effort required for your share of investment research and other duties, it may be best to pass. Other members will likely resent you if you're not all in, and you won't get much out of the experience. What's more, like many other investment vehicles, clubs typically reward patience. Holdings may need time to grow and weather market shifts, so if you decide to join, you should be prepared to be in it for the long haul.
Where to Learn More
BetterInvesting.org, the official website of the National Association of Investors Corporation, offers a wealth of resources for investment clubs, including advice and sample paperwork that can be used to start a club and information on finding existing clubs around the country.
Joining an investment club can be a great way to explore investment options, learn about new companies and securities, build up your investments and make some new friends along the way.