Getting Your Club Together
Find potential members for your club. They can be local, so you can meet in person, or they can live far away, and you can meet online. Aim for a club with 10 to 15 members, but anything from six to 20 is workable. When you have fewer people you might have trouble getting enough funds together to invest (some investments favor the larger investor). However, with a large group, both maintaining high-quality discussions and finding a place to meet become concerns. Spread the word. Tell family, friends, and co-workers about your club-in-the-making. Put together a flyer describing what you have in mind, and pass it out, post it on message boards, send it through e-mail, etc.
Hold a preliminary meeting. Get together with the people who are interested, provide snacks and refreshments, and discuss the formation of a club. Define goals. Are people more interested in the club for its educational value, or for the financial returns? Are they interested in short-term or long-term investing? (Most investment clubs use a buy-and-hold strategy.) Will your members share a general investing philosophy and approach? Determine how much each member can contribute financially. Is this consistent with your goals? Discuss a joining fee. This will be used to pay administrative costs. Make sure potential members know about this up front. Set minimum monthly contributions. If people make different contributions, their returns should be proportional. You can either pool your investment funds and invest together (a common practice) or invest through individual accounts (self-directed). Consider starting your club through BetterInvesting.org, an organization that can provide education, support, and online tools and resources for your club. Determine if your club needs to register with the SEC. You can find more information on the U.S. Securities and Exchange Commission at: https://www.sec.gov/investor/pubs/invclub.htm
Gauge member interest level. In other words, decide whether you really want to invest with these people. An investment club will involve significant risk for those involved. The risks, and consequently the rewards, are shared among all members. This means that everyone involved should be equally interested and participate similarly. Be on the lookout for red flags among your potential members. For example, consider carefully members that might: Fail to pull their own weight (Should the club allow them to stay?) Have only a casual interest in investing and do not participate regularly Fail to show up at meetings or make investments on time Fail to choose and stick with an investing strategy Advocate stock purchases without sufficient research Fail to treat the club as a business Fail to support the creation of interesting and education-based meetings Allow others to do all the work Accept less-than-flawless record-keeping Engage in "finger-pointing" when encountering an unprofitable investment or missed opportunity
Hold an organizational meeting to iron out the details. Have another get-together with the people who are still interested to discuss and implement the club's policy and organization. The first step should be to decide on an official name for your group. Next you'll want to decide when and where to meet (a living room, library, church, or coffeehouse, depending on the size of the group). Meetings should last an hour or two. After defining these basic rules, consider also doing the following: Defining and appointing roles within the club (president, secretary, treasurer, investor). What are their responsibilities? The terms should be one or two years, and the treasurer should have an assistant who can move up later. Writing out how the club will manage payouts, divestiture (reducing assets or investments), or dissolution. Laying out the policies on gaining new members and figuring out what happens when a member wants to leave the club.
File the necessary paperwork. In order to pool your money and invest together, you will need to incorporate your investment club into what is known as a general partnership. You will have to write out the rules of this partnership and its operation and have each member sign it once you all agree.. You should also write a club operating agreement. This would outline all the policies discussed in the previous meeting and should be signed by everyone in the group (as well as others who may join later). There are sample contracts and agreements available online and in books. To pay taxes, you also have to apply with the IRS for an Employer Identification Number (EIN) and file a "Certificate of Conducting Business as Partners" form with a local jurisdiction (such as a Secretary of State office). Contact your local jurisdiction (city, county, or state) for more information.
Investing with Your Club
Open a brokerage account or bank account. Most clubs start with both a checking and a brokerage account. Choose a broker who suits your needs (full-service, discount, or online). A full-service broker will provide advice and may attend a few meetings, while a discount or online broker will leave you to your own devices. Many investment clubs end up choosing the latter.
Develop an educational agenda. In most cases, investment clubs are formed by people who are still learning about investing. Not everyone is on the same page in terms of his knowledge base. Ask each member what big questions they have about investing. Having them submit questions anonymously is a good option. Choose the topics you feel should be addressed as a group. Make a "syllabus" and decide who will be doing the research and presenting the topic to the group. You may also wish to provide a list of good, reliable sources for research. In general, you should stick to reputable financial news services and online investing encyclopedias.
Research potential first investments. After a period of time, when contributions to the club have been made by group members, you're ready to start looking at first investments. Have each club member research potential asset purchases like stocks, mutual funds, or investment properties and defend her choices with research. Then, you can have the group vote on their favorite choices and determine how much money to allocate to each. Remember to keep some of your initial money uninvested in case the market presents an opportunity.
Invest as a group. Finalize your choices for your first investment and take the plunge. As your club continues operating, evaluate new and old investments during your regular meetings. These will typically be held once a month, although market conditions may dictate more frequent gatherings. In these meetings you should also: Review club finances (overall gains or losses, individual investment progress and cash balance available for investment). Give presentations on timely and relevant topics. Discuss and decide how to invest. Make sure you have designated a single, trustworthy member who has the authority to buy and sell on behalf of the club.
Have fun. Celebrate your victories and commiserate your losses. This is one of the biggest reasons people join investment clubs. You could even set aside some of your gains for group outings or events. The idea is to keep everyone entertained and involved in the group so that they keep contributing funds each month and don't get bored over time.
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