Starting An Investment Club

FS-583, September 2000
Debra Pankow, Family Economics Specialist

What is an Investment Club?

Investment clubs have been around the United States for nearly one hundred years, and are generally developed with a group of people who share social interests plus a desire to learn more about investing by investing in the stock market. The investment club is not for the get rich quick at heart, but for the individual who wants to be better off financially in five to10 years, plus learn the basics of investing in the stock market. Investment clubs encourage you to invest regularly and knowledgeably, and to understand the various risks associated with investing.

Since clubs usually limit their size (average size is 12 to15), and opportunities for joining an existing club may be limited, individuals who are interested in learning about investing may need to consider setting up their own investment club. Most clubs already have the maximum number of members they wish to have in their club; if there is an opening, it is likely that a close family friend or relative of a member will be asked to join.

This publication was designed to give you the basic facts and information you will need to proceed with setting up an investment club.

What Is Your Goal?

When establishing an investment club, one of the most important things for the group to decide is the club's purpose. If all the members are interested in getting rich quickly, the investment club is not the answer. If, on the other hand, members view it as a chance to learn over the years about selecting and making wise investments, the investment club is a great way to accomplish this goal. To make your venture into an investment club successful you should commit to at least five or more years involvement with the club.

Investing in the stock market is a long-term proposition and one that should not be taken lightly. Forming an investment club means going into business with 10 to 20 other people — people you trust and will trust you in return.

Some other goals investment clubs might have are to make new friends and to have fun. Opportunities for new and lasting friendships abound at the local club level and can branch out to activities at regional and national levels.

How Does the Club Work?

A group of about 10 to 20 people usually organizes and establishes several ground rules for their group. Rules that should be decided early in the club's formation are:

1. Monthly meeting date and place. Finding a time that works for everyone can be a real challenge, but attendance at meetings is very important to accomplish club goals. Some clubs establish a fine or penalty if members do not attend a certain number of meetings during the year.
   
   
2. Name of the club. Have fun with this — the club name should be something that relates to others, your purpose and perhaps your location. For example, one club might choose the name Towner Women's Investment Group (TWIG). It tells what the club is about and where members are from, yet also has a fun acronym.
   
   
3. Formation of a partnership and drawing up a club agreement. Investment clubs usually establish themselves as a legal partnership (for tax purposes). Look at different examples of club agreements to get an idea of what your members would like. Examples can be found from another local investment club, books such as those written by the Beardstown Ladies Investment Club, and the Official Guide to Starting and Running a Profitable Investment Club written by the National Association of Investors Corporation (NAIC). Assigning a committee to develop the potential club agreement works well as a starting place. Reviewing the agreement with club members will force you to make decisions that will help the club function well in the future. In most cases an attorney will be necessary to finalize the legal partnership agreement.
   
   One decision to make is whether to form a partnership or corporation. Many clubs choose the partnership route because of tax consequences. In a partnership, the club usually is not liable for taxes, as investment clubs earnings are passed to each individual member, who must pay the taxes on their share. In a corporation, both the club and the members will be taxed. Your choice as to which type of organization should be based on the tax rates which apply to individuals in your club, compared to the tax rate that would apply to the corporation.
   
   
4. Setting a minimum monthly contribution. Monthly contributions vary from $20 up to $100 per member, depending upon what club members feel they can afford.
   
   
5. Goals for the club. Once again, it is very important that over the long-term club members want to learn about investing in stocks. Clubs that operate with the main goal of educating their members about investing will find that profits naturally follow.

Selection of Members

Just talking to two or three friends and having them invite their friends can lead to club formation. News releases to the general public or personalized letters can also can inform others about the impending club formation. Once the club is formed, recruiting members could be considered making a public offering of securities to others; it would be illegal to recruit members using news releases, advertisements or recruitment letters after the club is formed.

Members also should be aware that they are all expected to actively participate. Active participation can be specifically defined for a particular club. For example: group members may need to contribute dues/fees monthly, spend time researching and tracking corporations/options etc., give reports to the club members, or participate in other activities related to learning about investing in the stock market. A club that retains passive members may be considered as issuing securities and thus have legal and tax consequences.

Example of a news release and personal letter of invitation follow:

Investment Club To Form Anyone in the (town) area interested in learning more about investing is invited to an organizational meeting (insert time and place) to consider forming an investment club. Members of an investment club invest as a group rather than on their own and share responsibility for managing their investments with others. Clubs divide the work of studying stock among members, making it possible to learn about many companies and industries without spending many hours of investigation. Dues will be set at the organizational meeting and will probably be in the range of (insert dollar amount) per month. Both new and experienced investors are welcome. If interested call (insert your name and title) at (insert your business address and phone number) before (insert deadline date).

Dear ____________________________: I am in the process of organizing an investment club for the (insert town) area. The club would truly be for educational purposes and to establish new friendships. "Getting rich quickly" would not be one of the goals of the club. Others have told me that investment clubs help them learn to invest wisely so that they can then build their personal investment portfolios. The club would meet monthly at a time and place determined by club members. Members would contribute dues (approximately $________ to $________ monthly, specify a range here) that would, after careful study and a majority vote, be invested in promising stocks. Members would be required to research and follow stock investments, both those held by the club and those under consideration for purchase. The first meeting is scheduled for (date...time...place). We will get a chance to meet one another, establish the best time for future meetings, an hopefully anser any questions you may have. I believe it will take at least two to three months to really get established and begin collecting dues, setting club goals, and gaining the educational background necessary just to get started. I do have two key resources people who are very willing to help us get started (these people were involved in investment clubs of their own). If you think you would like to attend this meeting, please return the enclosed card by (insert date) and put it on your calendar to attend. Please ask your friends to come along if they are interested. The greater variety of background we have in memberships, the greater the group's chances of success. Please give me a call if you have questions.

Yes, I would like to hear more about joining the investment club. I will be at the first meeting on (insert date). Yes, I am interested in joining but cannot attend the first meeting. Please give me a call at _________________ or drop me a card to let me know when the next meeting will be.

Your First Meeting

Before your first meeting, request some of the free materials offered by the NAIC (National Association of Investment Clubs, www.better-invvesting.org). If you are not online, you can write them at: 711 W. Thirteen Mile Rd, Madison Heights, MI 48071. Make a set of materials for each potential member. You will also need to secure a meeting place. A local school, library, or bank may have a meeting room available without charge.

At the meeting, go over the materials you have provided. Have everyone go around the room, introduce themselves and explain why they came to the meeting and are interested in joining an investment club. Emphasize it is not a get-rich-quick opportunity. Explain the principles of slow wealth building. Ask for questions. If possible, have an experienced investment club member available to help answer questions that may come up.

When the group is ready to move to organizational procedures, you will find the materials in the NAIC guide very useful, and full of details. You will need to decide on a time and place for your meetings. Try and make them all the same time every month.

At this first meeting, you will need to establish the amount that will deposited each month by every member. Stress that the amount should be considered "risk capital." Even though you will be studying hard and are expecting a good rate of return (as well you should), members should expect losses and not anticipate unreasonable gains. Beginning clubs should make it a policy to discourage withdrawals within the first few years, but let everyone know they have access to their money if necessity dictates. If new members are added, they do not have to match the previous contributions of current members; they will have pro-rated shares in the club's portfolio.

You will need to discuss the idea of working with a broker. An online club can take advantage of one of the online discount brokers available. You may decide your club needs a full-service broker, at least at first. While brokers usually operate on a commission for services (investments sold), many may waive or reduce the commission, with hopes that they gain other investment business from club members.

Future Decisions

As your club begins to form, you also will need to make more decisions. You will need to elect officers, for example. The ususal president, vice president, secretary, and treasurer should suffice, but one important position is that of an educational coordinator. Someone needs to be responsible each month for planning a brief educational session or assigning a club member to come prepared to teach other members some facet about investing. In some clubs the vice president also is the educational coordinator.

Identifying Number

Each club must have an employer identification number to use when filing its tax return. Obtain SS-4, Application for Employer Identification Number, by calling 1-800-TAX-FORM (1-800-829-3976) or by accessing the IRS web site at: www.irs.ustreas.gov

For Education... and For Fun

Don't forget some fun to make this educational experience special. A North Dakota investment club could plan a field trip to New York City to visit the stock market, an investment banking firm and other financial sites. A similar trip might be planned for Minneapolis, Kansas City, Denver, Chicago or Omaha.

For More Information

For more information about starting an investment club, contact:

North Dakota Department of Banking and Financial Institution
600 E. Boulevard, 13^th Floor
Bismarck, ND 58505-0080
(701) 328-2253

NAIC (National Association of Investors Corporation)
PO Box 220
Royal Oak, Mich. 48068
(810) 583-6242
www.better-investing.org

AAII (American Association of Individual Investors)
625 N. Michigan Ave.
Chicago, Ill. 60611
(800) 428-2244
www.aaii.org

References used in writing this publication

Beardstown Ladies Investment Club the Beardstown Ladies' Common-Sense Investment Guide. New York:Hyperion, 1994.

Investment Clubs and the Securities Exchange Commission, June 1998, at www.sec.gov/consumer/invclub.htm

IRS Publication 550. Investment Income and Expense.

O'Hara, T.E. and Janke, K.S. Official Guide from the National Association of Investment Clubs Starting and Running a Profitable Investment Club. New York: Random House, 1996

Based on materials developed by:

Leanne Manning, Extension Educator, University of Nebraska Cooperative Extension-Saline County

Kathy Prochaska-Cue, Extension Family Economist, University of Nebraska Cooperative Extension

FS-583, September 2000