An investment club is a great way for novices to learn the intricacies of stocks, bonds, and mutual funds with relatively low cost and low risk. Each club has its own rules and requires members to provide a designated amount of money each month that the club then invests. Profits and dividends are reinvested in the club until it reaches a stated financial goal.
If you don’t know of one to join, you can start your own.
Here are the basic guidelines:
- Structure — Most clubs are formed as partnerships rather than corporations. Partnerships steer clear of the paperwork, are easier to maintain, and often minimize taxes.
- Meetings — Make sure you establish a specific time and place to hold regular meetings. Also, remember that the club is a learning environment, so always have an agenda, including a portfolio review, stock analyses and recommendations, and a vote for stock choices.
- Rules — Draw up a document on the club’s procedures and policies. What will you invest in? What’s the maximum contribution any member can make? How do you join or leave the club? There are several areas you need to spell out, but don’t be afraid of changing the document. Alterations may be necessary as the club matures.
- Responsibilities — Elect officers and assign responsibilities for each position. Not everyone can be an officer, but you’re looking for full member participation, so it’s important that every member of the club be assigned some kind of responsibility.
- Tax ID Number — It’s important to name your club and get a federal ID number from the U.S. Treasury office. Open up a bank checking account under the club’s name.
- Brokers — Depending on your investment objectives, you’ll need to decide whether or not you want a broker. Choose one, either full-service or discount, that best suits your needs.
- Study — Again, one of the primary functions of an investment club is to help everyone learn about the principles of good investing. For instance, set up a program in which each member has to investigate and analyze a company stock. Another way to increase learning value is to host speakers on various investment subjects or go on field trips.