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 broker 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, 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:
1. Attending each monthly meeting;
2. Making a minimum monthly contribution, which is usually in the
ballpark of $50-$100, but each investment club sets its own monthly
3. Researching and following the progress of a particular stock or
family of stocks that the club has bought or is considering for
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 35 reports and
graphs, and much more. (A free
60-day no-obligation trial is available.)
At the minimum monthly contribution level of
$50, 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 fifteen
people, and all fifteen 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 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
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
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?
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 as well as 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,
but rather each individual member is responsible for reporting his/her
share in the partnership, and the gain or loss involved. Direct investment
expenses are usually deductible if you itemize your tax return, as would
be a potential capital loss during each year of the club's operation.
Likewise, an increase in the value of your share in the club would
eventually be taxable on your personal tax return.
How Much Will It Cost?
Besides partners' monthly capital
contributions, their club expenses (such as broker's fees, postage, and
stationery) can also be incurred, but these are usually nominal since they
are spread out to all members of the club.
Get Started Now
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