Investment clubs have been around for several years now. If you and your friends have a good amount of money saved in your banks and you are thinking of investing in a business, all of you can get together and start an investment club. It is a fun and realistic way to invest money with close friends. In simple words, investment clubs are a group of people who pool their money to invest in shares, stocks, and bonds. We have put together resources and steps you need to follow to start a profitable investment club with your friends.
What Entails an Investment Club?
The members of the investment club study stocks, shares, bonds, and other investment tools. The primary objective of investment clubs is to make money. This is achieved when each member speculates stocks, learn more about the market trends, and report their take on great investment to the group. You will pool your money together to make a joint investment decision.
We suggest that you make this your side business, as an additional income to you. Only if you start making an immense profit should you consider it a full-fledged business? You can establish your investment club as a legal entity, making its framework or policies similar to that of a mutual fund.
How Can an Investment Club Be an Advantage to You?
Your investment club will look like a small-sized mutual fund. The only difference is that the decisions will be made by non-professionals. If you plan to establish the business as a legal entity, as either a limited liability company or a partnership, you will enjoy the benefits that include in the said company policies.
Management fees can have a significant impact on the overall investment returns in mutual funds. However, unlike mutual funds, investment clubs do not come with the burden of management fees that levy on their unitholders.
What’s more interesting is that the profits (and losses) that your club realizes will entirely depend upon your friends, i.e. the club members and your capabilities to choose the right investment for the club. The level of market research, the alertness, and the interest in purchasing the right tool will be more when compared to purchasing mutual funds from major companies.
Mutual funds are handled by mutual funds managers, who are entrusted with our money. We have to go with their knowledge, experience, skills, and understandings of the funds. We don’t have control over our money. However, with the investment club, you not only get an opportunity to replicate mutual funds but you also get to use your skills to improve a few of the management attributes as per your wish.
An investment club offers a great opportunity for its members to share the load and make an informed decision in less time and effort. Investment clubs provide a safe and secure learning experience for new investors in mutual funds. It gives a perfect opportunity to hone skills and accelerate investment learning.
As an investment club member, you will be getting an additional buying power and a chance to build a diversified portfolio – a shared portfolio enables the club to invest in stocks that individual investors may not be able to afford on their own.
Steps to Start an Investment Club with Friends
Step 1: Find Your Friends a.k.a Your Club Members
Your club should consist of a minimum of 10 – 15 members for a profitable investment plan. If you have less number of friends, you can start with six people also. However, the more the people you have the lesser will be the trouble in getting enough funds for investment. For instance, some great investments favor larger investors.
Larger groups come with more responsibilities, management principles, and more coordination. You have to maintain good rapport with everyone, make sure everyone’s on the same page, include everyone in the group discussions, and regularly update each one about the business. Finding a place to meet also becomes an additional concern with larger groups. So, you will have to consider all factors before forming your club member gang.
Finding the right member for your club is the hardest part of this business. Each one of you should understand the importance of investing, identifies investment and should contribute money, time and opinions when and as needed.
Yes, you will have to bring together those people who are willing to contribute to the success of the club and leave the ones that are just freeloaders.
The members should be trustworthy, organized, sound decision-makers, proactive, willing to research, make a payment on time, and have very sharp instincts.
Step 2: Establish an Organizational Structure
Hold a preliminary meeting to discuss the formation of the club. A smaller club will have an informal structure. It is just friends that will be part of the club. If you include outsiders, you need to establish a fitting organizational structure. However, even amongst friends, you will need to form a pre-defined structure so that nothing goes wrong when it comes to dealing with money.
Your organizational structure should have the following basics:
- If the club is beyond 10 members, you need a president, a vice-president, a secretary, an assistant treasurer, and a treasurer. All of them should be trustworthy. You have to develop a term for their position. Start with a yearlong term and then change or modify as per their performance.
- Determine the role and responsibility of each person. Who will place the physical trade? Whose place the meetings should be carried? Who will do the taxes? Who would be in charge of the educational aspect? Who will see the logistics and paperwork? Make sure you appoint at least two people for each work to make it effective.
- Fix a time and place for your meetings. This is important for people to stay on the same page. The investment club members should meet at least once in 10 days to discuss plans and investment strategies.
You can decide two or three common and easily accessible places for the regular meet-ups. Make sure you do not keep your meetings over lunch or dinner. Eating during meetings can produce a negative impact on making informed decisions.
Step 3: Set-up Club Rules and Goals
Define the goals of your club. Are you setting the club for educational value or for financial benefits? Are you looking for short-term goals or long-term investing? Will your investment club use a buy-and-hold strategy? What should be your club’s general investment philosophy, mission, and vision?
You have to set up basic buying and selling rules. For instance, you have to determine the financial contribution that each member should make towards the club. You have to set minimum contribution and if each member makes a different contribution based on his or her capabilities, you have to set the proportion of return as well.
Investment clubs usually pool funds and invest together. However, you can invest separately through individual accounts as well.
You have to also set the club entry and exit rules. For example, determine the joining fees, the pay-out fees if a club member quits, how to add members and how to end the club. Remember, uncertain calamities can happen anytime. So, you will have to be ready with backup plans to ensure smooth sailing of the club.
Establish Record Keeping
It is important that you keep an accurate record for each member’s percentage of the equity. You have to communicate this with each member. Determine how you will possibly do it. It is advised that you appoint an accountant for maintaining the records for each member. You can use online tools, such as Google spreadsheets or any other app and share it among your club members.
Step 4: Establish Your Club as a Legal Entity
It is important that you set up a legal structure for your club, no matter how small or big it is. A legal entity is important for opening a brokerage account as a club and for operating the company ethically as the investment returns grow big over time.
There are several types of legal structures but the most viable for your investment club should be a limited liability partnership. You need to obtain a partnership agreement. Get professional help from a lawyer to form the agreement. Make sure each member reads it, understands it, and agrees to it before it is signed and sealed.
Moving on, you will need a bank account for securing your pooled money and returns. A corporation cannot open a bank account without an EIN (Employee Identification Number). So, you will have to obtain it from your local authority. You can apply it online free of cost. Check your state’s IRS website for more information.
Step 5: Open a Brokerage Account
You have to open a bank account and a brokerage account to start investing. You have to choose a broker who would fulfill your needs. You can opt for a full-service broker or an online broker. The choice is yours. However, most investment clubs choose an online broker as the former charges a higher fee. You can use one or both. If your broker is considerate enough, he may even help you get started investing, and educate you with the fundamentals.
Step 6: Establish a General Agenda
You have started your investment club with friends and non-professionals. So, most of you may not understand each and every term related to investing funds. Not everyone will be on the same page when it comes to performance and financial knowledge.
So, prior to each meeting, ask your members to make a list of doubts and questions they have about investing and submit them anonymously. Select the vital topics you think need to be addressed. Make sure everyone adds something valuable about the topic to increase knowledge and awareness.
You can also start a guidebook, ask one member at a time to research a topic, and present a report to the group in the following meetup. The topic of information will be added to the guidebook.
For more information, go through reputed financial news, magazines and online blogs. You can try getting experts or influential people to speak about a particular or trending topic to educate and inspire members. This could be done once in a while. You can also invite expert speakers to share stories or facts with the club members.
Step 7: Start Investing
Once the contributions have been made, start looking for investing options. Each club member should potentially research about the assets that can be purchased. They should then present with their choices with valid arguments. Once it is done, have the members vote on their favorite choices.
When the assets to be invested are identified, you have to decide how to allocate the funds. Make sure the decisions are made as a group so to avoid any unnecessary conflict. If you are not able to arrive at a decision, then go for votes.
At each meeting, review your investment, club finances, profits or losses, and other important stuff related to the club.
Since, you will be investing with your friends, make business fun and memorable. Don’t forget to celebrate victories and hug out losses. Involve each member equally so that they feel appreciated and engage more.
What are your thoughts on this blog? Was it helpful? Do you want us to add anything else? Do write to us in the comments.