Amateur investors can get more for their money when they work together. For decades, they have been doing just that, meeting after work or on the weekends to talk stocks and other opportunities, to make a little better return on their money and maybe learn something in the process. Investment clubs first became popular in the days before online discount brokers, when commissions on trades were high and access to the market was limited. The relative ease with which retail investors can get involved in the markets through computer technology makes investment clubs an even more viable and important option for the layman.
Function
The purpose of an investment club is to make money in a collaborative environment. Most are less formal than an incorporated investment business but can be just as effective. Similar to an investment firm, the individual members contribute their experience and perspective. Unlike most investment businesses, however, the members of the club are also managers and invest their own money rather than trying to raise cash from outside investors.
Benefits
Many of the members in an investment club find the whole thing to be a valuable learning experience. The insight and perspective of the other members give members a broader understanding of markets and the investment process. Of course, there's also the increased earning potential of the larger, collective capital base. Investment clubs are also very flexible in their structure, so they can fit the custom needs of any group. And, on top of all that, getting together with friends to discuss money matters can make investing fun.
Features
Because money is involved, investment clubs can't be entirely improvised affairs. Members should agree to the amount and frequency of regular contributions to the club's investment capital. They should keep regular meeting times, with the goals of each meeting and of the overall club well-articulated. Whatever the club's goals, they should be matched by an investment style well-suited to achieving them. Though all members should be allowed to contribute, certain roles should be formalized, particularly the keeping track of the group's paperwork and the placement of trading orders. Members should make a plan for the eventual day when one member will want to or have to leave the club.
Size
When recruiting members for an investment club, the best place to begin is with friends. Depending on the depth of talent and disposable income you can find in this immediate circle, it might be necessary to look beyond, perhaps to friends of friends and professional associates. There's no ideal number for an investment club, but the membership is probably best served by a variety of perspectives and levels of experience. A large club could be difficult to focus and direct, but having too small a club might not provide the advantages of pooled capital. It is important to remember that not all members have to be experienced traders, but they should at least be able to make contributions of time and money to the club.
Considerations
Investment clubs can be organized under a wide variety of structures, but tax considerations should be paramount when choosing the form of the group. Some clubs are partnerships or revocable trusts, which allow club income to flow through to the tax returns of the individual members. Nevertheless, a club can choose to incorporate and be taxed as a separate entity. To open up an investment club trading account, the members will likely have to get an Employer Identification Number (EIN) and file annual returns with the IRS.
