Investment Clubs: Safety in Numbers

So you want to plunge into the world of investing, but you don't know how to do it? For safety in numbers you might try joining an investment club. Being in an investment club is probably one of the best ways for you to get active hands-on experience and lots of feedback and consultation as you invest.

And as a woman, you will certainly be in good company. The National Association of Investors Corporation (NAIC), the umbrella and resource organization for investment clubs, reported in 1998 that 50.2 percent of its clubs were women-only clubs. And the clubs' reported results showed that women's clubs had an average return rate of 32.1 percent annually -- better than the 23.2 percent average return rate for all-male clubs and 27.4 percent for coed clubs.

How do clubs work? When you are part of an investment club, each club member contributes a certain amount of money each month to the investment club kitty. Then, using the kitty, the club as a whole buys stock in particular companies. Over time, an investment club will acquire a "portfolio" of different stocks bought at different times.

Take Nina. She was maxing out the contributions she could make to her 401(k) retirement plan at work, but before she began investing on her own, she wanted to learn more about the stock market. So she found out about an investment club through some friends at work and joined it. The club, with 20 women members, meets once a month. Nina and the others contribute at least $25 a month to the club kitty. And then each month, one of the members of the club makes a presentation on a particular stock she has researched.

As a member of the club, Nina might, for instance, volunteer to research Intel, the Santa Clara, California, producer of computer chips. She would spend time during the month reading up on Intel, and at the following club meeting she would make a presentation on her findings. She would explain what Intel makes, whether its profits have grown or shrunk and, finally, whether she recommends that the club buy the stock. The rest of the club would then would debate whether to buy Intel stock or do more research and, after discussion, vote on whether to buy, research further or dismiss the idea.

In most clubs, two-thirds of the club members would have to be present in order for a vote to be taken. If more than 50 percent of the members present had voted in favor of the stock, a purchase would then take place. These procedures can vary slightly from club to club. The NAIC has sample bylaws, which help club members create rules to govern voting, stock purchases and administration.

What if you were in an investment club and wanted to leave? How could you get out? Depending on the clubs by-laws, you could choose one of two ways. You could ask the other club members to buy out your share of the club and then just walk away. Or you could find someone to take over your holdings and be accepted by the club to take your place. If the club agreed, by a majority vote, you could sell your portion of the investment club portfolio to that person, who would take your place as a voting member of the club. Read on to find out about joining or forming a club.

Joining a Club

To find an existing club, go to the NAIC Website -- specifically this page -- and you will find a list of contacts, clubs, events and investors fairs in your area.

Generally speaking, you should join a club that has 10 to 20 members. If membership is less than 10, each member would have to be pretty active to meet all the club responsibilities. But if there are more than 20 members, candid discussion and decision-making may become more difficult.

Costs: Most investment clubs, online or off, require a monthly contribution to the club pool of funds. In most cases, that contribution is $25 or so, but members are allowed to contribute more. If the club is a member of the NAIC, part of the monthly contributions will be used to cover annual membership in the NAIC, which then in turn provides clubs with such benefits as educational materials, accounting forms and software.

Duties: Most offline clubs meet once a month. Most online clubs maintain a message board where members can post at any time. Almost all clubs require members to take on responsibilities during the month such as collecting dues, keeping track of the financial status of the club, researching stocks, making stock recommendations and buying stocks for the club.

Taxes: Most investment clubs are organized as limited partnerships, a legal structure that allows the club to pass on any gains or losses from the stocks in the portfolio onto the investment club members. For tax purposes, the profits of the club are allocated according to how much stock each member owns. But keep in mind that taxes only need to be paid on realized gains. That means that if the stocks owned by the club rise but are not sold for a profit, there will be no taxes to pay. Only when stocks in the club are sold for a profit will each member of the club have liability.

Starting a Club

Check out the book Starting and Running a Profitable Investment Club by Thomas E. O'Hara and Kenneth S. Janke Sr. This book is the official guide created by the NAIC and it provides a step-by-step guide to starting your own investment club. You can order it from NAIC online. Also, once your club is up and running, there are Web-based tools that will help club members communicate with one another and help the club administrators keep track club investments. For example, Investmentclubs.com , for a monthly fee of $25, will allow you to create your own club Web page. The software makes it easy to input data every month and keep track of money, stocks, profits and losses. Only the appointed club administrators can change any data on your club's Website, but individual members can access the site and see how their percentage of the club portfolio is doing.

Recruitment: If you want to form an investment club you must recruit responsible, reliable people who are eager to learn. An investment club is only as strong as its membership.

Administration: Setting up an investment club is a real task. It requires setting up a bank account, drawing up a partnership agreement and setting up a brokerage account. The NAIC can provide you with software and club-accounting guidelines that will help with the bookkeeping and help keep track of partners who invest different amounts each month and absorb members who join at different times.

Learning: Even before researching individual stock, members of an investment club should familiarize themselves with investing terms. You should know what the various stock exchanges are, what the major indexes are, how to see if a company is becoming more or less profitable. The NAIC provides background material that will help members learn about all these things.

Research: Finally, individual members need to research stocks and each member of the club needs to be able to make a recommendation. Again, the NAIC has information and material, which can help new investors get started and learn the ropes of researching individual stocks.

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