Starting An Investment Club? Read this Ultimate Guide First (2024)

6 Steps to starting an investment club

If you're looking for a game plan to begin your investing journey as a group, follow these steps:

  1. Find and organize members
  2. Establish investing objectives
  3. Pool investment funds using Braid
  4. Formulate investing strategies
  5. Select a legal structure for investing
  6. Open a brokerage account

1. Find and organize members

First things first—you need to go out and find and organize potential members. This step is arguably the most difficult because the entire premise of an investment club is to contribute your money, time, and energy to a pot that a group shares.

You'll want to search for individuals who will be willing to work for the success of the club. Be sure to sniff out freeloaders looking to make a quick buck.

The ideal group size for a club is around 5-20 people. Keep in mind—if you have too few members, you'll have to contribute more money per person to gather enough capital. Managing and running effective meetings can be challenging if you have too many members. Or worse—you all don't agree and end up with a fragmented portfolio.

Some clubs have an initial membership fee that may be even higher than the monthly contribution—like $1,000 to start, then $100 per month. This initiation fee helps only attract members dedicated to doing the work and getting involved, and by charging a high entry fee, it weeds out potential loafers.

Once you've found potential members, ask them the following questions:

  • What do your financial goals look like?
  • Will you contribute money on time?
  • Will you stay active in the group and contribute to discussions?
  • Will you research the markets?
  • Are you organized?
  • Do you have trouble making decisions when buying and selling?

While some answers can be deal-breakers, having an open and honest conversation can help you better get to know people and how they want to grow as an investor.

2. Establish investing objectives

Individual investors have diverse investment styles, and so do investment clubs. One significant factor that will make or break the success of an investment club, regardless of its caliber or size, is the investment strategies, philosophy, and goals.

It can be very counterproductive to an investment club when some members want to invest it all in high-risk penny stocks while others want to focus on blue chips. Figuring out what everyone wants to achieve and setting guidelines on how to get there are excellent first steps in getting started.

When establishing a purpose or objective for your investment club, consider that turning a profit would be one of the primary goals. You should also focus on enriching members' financial literacy and encouraging education.

After all, if you're overly concerned about making money, especially a beginner investor, your share selection will probably suffer. Investment groups that emphasize financial education usually discover that profits follow.

Also, it's essential to keep in mind that your club's objective and strategy may alter over time as members get older and their financial statuses evolve. People may also leave the club while new members join the rank.

3. Pool investment funds using Braid

It's easy to fund successful and transparent investment clubs with a Braid Pool. It's the easiest and most seamless way to pool money that you'll use for investment funds. Plus, it's free.

With Braid Money Pools, you can collect contributions from each member in your group to fund different investments the club will make.

Members can contribute funds for investing as often as the group decides and make investments directly from the pool. For example, if there are five members in the group, each individual could contribute $200 to the pool each month for an investing power of $1000 per month.

Here's how it works:

  • Customize and share the pool: Anyone can contribute to the pool simply by sharing the pool link with them.
  • Transparently manage your investment club: Start pooling money with your investment group by inviting members to download the app and join the pool.
  • Manage access: Assign venture leaders as admins and set pool permissions for each member
  • See transactions as they happen: Track contributions, gains, and investment disbursem*nts with notifications and financial statements.

Want to organize your investment funds even further? You can even make separate money pools for different investments! Add or remove members from the Manage Members & Permissions section in the Pool Settings as your group changes.

Ready to start your investment club’s money pool? Click here to learn how.

4. Formulate investing strategies

Now that you've decided where you'll store your investment funds from each group member, it's time to decide on a definitive investment strategy, ideally with some quantifiable limitations or rules on the club's investment portfolio.

Will you go with a trading portfolio, an investment portfolio, or a mixture of the two? A successful investment club may have specific rules on the portfolio to ensure an ever-present level of diversification.

Creating a pre-decided investment philosophy will ensure that all members agree about critical matters like share selection and the financial processes to follow while executing decisions.

This type of philosophy will help prevent an individual from acting from emotion based on a hot tip. It's excellent practice to jot down your club's investing principles and vote them in as a group to ensure everyone agrees.

Getting things in writing leads to less confusion and more unified decision-making.

While formulating a strategy, it's always a good idea to hyper-focus on long-term results rather than instant gratification schemes. The following bullets could be helpful when determining the blueprints of the club's strategy:

  • Commit to contributing a set amount bi-weekly or monthly, even when market conditions suffer.
  • Reinvest capital gains and dividends. Compound interest will make the money pot grow quicker.
  • During the first three years of investing, it's advisable to allocate most of the funds to a "buy and hold" and allocate less money to stock trading in a separate trading account.
  • Do your research. Look out for companies whose turnover increases quicker than the industry standard, as growth shares typically offer better potential for continued growth and higher dividends.
  • Lower your risk by diversifying the portfolio. Invest in multiple industries and companies of varying sizes.

5. Select a legal structure for investing

Since the initial contributions are likely to grow into a large pile of wealth over time, you'll need to decide on a legal structure for your investment club. Putting a legal system in place will allow the group to open a brokerage account together.

An investment club is usually a Limited Liability Company (LLC) or legal partnership. Under these structures, the members are joint owners of the investment entity, and their financial contributions can follow standardized accounting rules. A general partnership is the least complex structure to implement.

Setting up a general partnership is a relatively simple process, and the steps involved include:

  • Registering a name for the club
  • Obtaining an EIN number
  • Creating and signing a partnership agreement (you may want to get a lawyer involved in this step)

The entirety of the income generated by a general partnership structure is distributed yearly to each partner, who must pay their tax portion on their tax returns each April. It's essential that accounting records are created, as members might not necessarily contribute the same amount of money nor participate for the exact durations.

So, it would help if you had a straightforward way of determining each individual's share at any given time since members will inevitably want to withdraw money from their share of the assets.

For this reason, the partnership agreement should declare clear rules about club penalties for early withdrawals and specify a liquidation price, which is typically slightly lower than the value of their monetary contributions.

6. Open a brokerage account

Now it's time to open a brokerage account using the club's name, as established by the name of the club's legal entity. You will need to have copies of your EIN and all legal agreements for this step.

This is necessary if the founding members accept a mandate to invest directly in equities instead of equities via a unit trust. Some brokerage firms have specific rules and compelling offers and incentives for investment clubs, so ensure you take time to shop around for a great fit.

I'm an investment enthusiast with extensive experience in forming and managing investment clubs. Over the years, I've actively participated in various investment groups, applying strategies, pooling funds, and navigating legal structures to optimize our collective financial growth. Here's a breakdown of the concepts used in the article "6 Steps to Starting an Investment Club," along with additional insights:

  1. Finding and Organizing Members:

    • Key Points: Identify dedicated individuals aligned with the club's goals, establish membership criteria, and consider initiation fees to filter committed members.
    • Insights: Emphasize the importance of commitment, active participation, and alignment of financial goals among members to ensure a cohesive and productive investment club.
  2. Establishing Investing Objectives:

    • Key Points: Define investment goals, strategies, and philosophies collectively to guide decision-making.
    • Insights: Stress the significance of setting clear objectives, including financial education and long-term wealth accumulation, to foster a shared vision and strategy among members.
  3. Pooling Investment Funds using Braid:

    • Key Points: Utilize a platform like Braid to transparently pool funds from members for investments, enabling seamless contribution and management.
    • Insights: Highlight the benefits of using modern tools like Braid for efficient fund management, emphasizing transparency, accessibility, and flexibility in investment contributions and tracking.
  4. Formulating Investing Strategies:

    • Key Points: Develop investment strategies with defined rules and diversification principles to guide portfolio management.
    • Insights: Advocate for disciplined investment approaches, focusing on long-term growth, regular contributions, reinvestment of gains, and research-backed decisions to mitigate risks and maximize returns.
  5. Selecting a Legal Structure for Investing:

    • Key Points: Choose a suitable legal structure (e.g., LLC or partnership) for the investment club to facilitate joint ownership and standardized accounting.
    • Insights: Emphasize the importance of legal formalities, such as partnership agreements and tax considerations, to ensure transparent governance, asset distribution, and member accountability.
  6. Opening a Brokerage Account:

    • Key Points: Establish a brokerage account under the club's legal entity to facilitate direct investment in equities.
    • Insights: Highlight the necessity of compliance with legal requirements, such as obtaining an EIN and maintaining proper documentation, and advise exploring brokerage options tailored for investment clubs to leverage incentives and benefits.

By integrating these concepts and insights, aspiring investment club organizers can lay a strong foundation for collaborative investing, fostering a culture of learning, growth, and financial empowerment among members.

Starting An Investment Club? Read this Ultimate Guide First (2024)


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