What is an investment club?
An investment club is an investment group made of people who pool their money to invest together, according to the US. Securities and Exchange Commission (SEC).
Investors will make investment decisions and choose the style of their investments based on many factors. They will do research together to fully understand the market and securities they want to pursue.
Understanding An Investment Club
The investment world has evolved into many forms and sizes. It is possible that a group of investors can succeed where an individual cannot.
This is why sometimes investors pool their money and brains to form an investment club. After forming the club, its members will establish investment guidelines, styles, strategies, and regulations, etc.
They will make investment decisions together. For example, they can decide to buy or sell a stock because they think it will not perform well in the near future.
According to SEC, the investment club must register as an investment company when it meets the following criteria:
- When the club invests in securities
- The club is not able to rely on the exclusion of investment company
- If the club issues membership interests that are securities
Investment clubs can be treated like mutual funds. The only difference is that a professional manager manages funds owned by a mutual fund. On the contrary, investment clubs manage their own funds.
How to form an investment club?
Although there is no single formula on how to start investment clubs; there are proper steps to be taken to make sure that you start the club on the right foot. The following are a few tips you can use when starting an investment club.
- Start by finding a group of investors with a common goal. According to thebalance, investment clubs are usually made of 10-20 members.
- Sit down with all members and set up the structure of the club, regulations, style, meeting schedules, etc.
- Develop a legal structure
- Get your tax structure together
- Open a brokerage account in the name of the investment club.
- Decide how much each new member will contribute when they join. Also, define how the club will be funded. Are members going to be contributing an $x every month, year? Include that in your writings.
- Have objectives or investment goals and make sure that you assess your progress based on those goals.
- Start investing
What should you do before joining investment clubs?
It is not easy to join investment clubs. However, if you are thinking about joining a club, there are things you have to check first. The following is a list of a few things to help you join the right investment clubs.
- You must do research on the club to see if its agenda and investment goals align with yours.
- Check if its organizational structure will meet your needs
- Make sure that the club has a reliable legal structure that will protect your investment
- Make sure that you will be able to meet its requirements
- Learn more about investment clubs buy joining an investment association such as NAIC.
Benefits of investment clubs
- You can save money on fees that you could pay if you invested the money as an individual
- Working as a group can increase your success rate. Multiple investors who are researching the same company can come up with a greater conclusion.
- You can minimize losses due to extensive education and research about investment strategies.
- The club also avoids management and related fees. For example, if the club invests the money in a mutual fund, it will pay a management fee.
Disadvantages of investment clubs
- You must pay required contributions in the club
- The club will have regular meetings to discuss investment options and asset allocations strategies. You must attend these meetings.
- You will have to go with shared decisions. That is once you join the club, your personal investment options may no longer be effective. The decision you make must benefit the whole group not just yourself.
- There is a chance the club could lose money from bad investments.
