How to form an investment club

As beautiful as an investment club is, there are some things to consider before building or joining one. An investment club is not just what you start out of the blues neither is it built on a short term goal. When you plan adequately before starting one, your investment club can be a place where you learn about financial responsibility and how to build wealth. Also, the investment club can help you achieve your investment goal on time. Before examining the steps on how to build an investment club, there are a few things to consider.

What is an investment club?

An investment club is a team of like-minded investors who have come together to work as a body and achieve a collective investment goal. According to Lanta Evans-Motte, a financial advisor at Raymond James Financial Service, an investment club is a great way to learn about investment and become more knowledgeable about investment. An investment club is a place where investors join hands together to make a good return on investment. 

As a member of an investment club, you would benefit from investment knowledge shared by other members of the club and from the in-depth investment research of the club. The investment club provides you with investment power. For instance, as an individual investor who wants to invest in the stock market, you might want to just invest $50, but in an investment club of 12 persons, you all might decide to gather the $50 and collectively invest $600 dollars. In so doing, every member of the club benefits from additional leverage on investment. Joining an investment club built on a collective goal is one of the best ways to get started as a beginner.

However, if you are planning to build an investment club, below are the steps to establish a good one.

Steps to form an investment club

• Members of the club

The first step toward creating an investment club is to find the members who are going to be part of the club. However, it is important to note that, among the steps and strategies of creating an investment club, this is the hardest. The reason for this is because the members of the club are not only going to be people who are ready to write a check alone. They must also be willing to put in their time and idea to the development of the club. The success of the investment club is dependent on the dedication of your team.

From research, the minimum number of members for an effective investment club is 5 while the maximum is 20, keep in mind that there is no set minimum or a maximum number of members. When deciding on the number of investors that would be part of your club, keep in mind that the smaller the number, the more money you will contribute for investment, and the higher the number, the more difficult it is to manage the members and have an effective meeting. Hence, do not allow your club members to be too small or too many. 

For a start, you can set an initiation fee for investors who would be part of your club. Some clubs even set an initiation fee that is higher than the monthly contribution of the members. This is to ensure that anyone who will be joining the club will be ready to dedicate himself or herself to the success of the club.

• Set a structure for your club

Having decided on the members of your club and the number, the next step is to create a working structure for your investment club.  For the basis, the club should agree on the following:

• Club director

This includes those that would be managing the affairs of the club. They would include the president, the vice president, the treasurer, and his or her assistance, and the secretary. These offices are crucial to the effectiveness of the club and should not be left vacant.  While it is okay to have a President without the assistance, it is not okay to have a treasurer without assistance. This is because what you are dealing with in the club is money. As such, it is better to have at least two persons overseeing the club's money. When deciding on those to handle the affairs of the club, decide on their tenure too, and the job of each office. 

Also, ensure that those that will be filling these posts are trustworthy and discipline. A good leader would hasten the achievement of the club's goal but a bad one might lead to the ruin of the club

• Time and place

• After deciding on those to handle the affairs of the club, the next on your list should be the time and place to meet. If the members of the club are not too large, you could decide to make it a home meeting. 

Aside from the place, decide the time too. For instance, as a team, you can decide to meet once a month, twice or more. Whatever decision you make, ensure all the members of the club agree on this so as to avoid any inconveniences.

• Set the rules that would guide the club

For any investment club that aims to progress and achieve its goal, there should be a set of rules guiding the club. Ensure you have a semi-defined rule for buying and selling an investment, how to handle payout and distribution, how to handle a member who wants to quit, and also how to handle anyone who wants to join the club. Do not just take decisions when the need arises. Have a rule that guides every new development in the club.

• Get a legal structure

The most common legal structure for an investment club is a partnership.  The investment club is like a brokerage account. As such, you cannot open a brokerage account without a legal structure. 

For the effectiveness of your club, you will need either a partnership agreement or an operating agreement. This can be settle by getting a lawyer or choosing any of the available online options, for instance, Nolo or RocketLawyer. 

Also, you will need to register your investment club to get an EIN (Employer Identification Number) from the IRS.  

After getting a defined legal structure, the next step is to open a brokerage account. Although this can be done from full-service brokerages, their charges might be too high. For a cheap investment club brokerage account, you can visit TD Ameritrade. When opening the brokerage account, you would need the copies of your legal agreement and EIN.  

• Set a goal

Another important thing to consider when creating an investment club is the goal of the club. Since you already have a team and have agreed on some decision, choose an investment goal as a team. Ensure that every member of the club agrees to this goal. The ultimate goal of an investment club is that all members of the club get a good return on investment. As such, just as an individual would have a clearly defines the goal for the investment, the investment club should also have a goal, strategy, and philosophy that would guide the investment.  

Typically, the goal of an investment club should focus on the long-term. It is not ideal to base your goal on a short-term investment. 

When creating a long+term goal, ensure that all the members agree on this. This is because a member of the club cashing out on time before others can cause serious damage to the investment of the club. 

Also, it is advisable to decide on the type of investment. It will be very damaging to the club investment if some members of the club are advocating for high-risk stocks while others want blue chips. Identify a target sector, delegate research areas to the members of the club, and gather your findings for further discussion. 

After this, the club can invest. 

Notwithstanding, it is noteworthy that the strategies and guidelines guiding an investment club are not stagnant. This might change as the investment club grows. Some of the factors that can trigger the change include the age of the members, financial status, and new members leaving the club and others joining the club. All these can trigger a change in the strategies and guidelines of the investment club. 

Let the rules guiding your club be flexible enough to accommodate changes.

• Create a strategy

The goal of an investment club works hand in hand with the strategies formulated to achieve the goal. An investment club strategy includes the rules and limitations guiding the club's investment. It includes the type of portfolio the investment club wants to have. For instance, as a club would you want a trading portfolio or an investment portfolio or a combination of both. 

• Have some fun

Your investment club would become too boring if all you do is talk about investment. When a goal is achieved in the club, have some fun. Organize some good get together moment and party.  You can decide to meet in a member’s house, organize some fun moment, cook, eat and celebrate. Remember, every good win is worth celebrating.