Considering investing, but don't have the money? Try an investment club. The low-risk setting allows low-income investors a chance to share in a pool of money and quickly build a group portfolio. This activity also provides members with ideas on how to develop their own personal portfolio. Novices learn the basics. Pros enhance their skills. Overall, the environment develops camaraderie.

How Investment Clubs Work
There are more than 35,000 investment clubs in the U.S., according to the National Association of Investors Corporation (NAIC). Groups of friends, coworkers, neighbors and relatives averaging between 10 and 20 members make up the club. The clubs typically get together once a month. Members may contribute dues ranging between $25-100 at each of the meetings. The money is used for investments, such as stocks, mutual funds and bonds. In 2006, the average investment club was four years old with 11 members, according to Better Investing, an investment education non-profit organization. The average member contributed $84 and had a portfolio worth $86,700.

The clubs operate like a business. The meetings typically begin with a roll call, an economic report and a treasurer's report. A stock presentation is made by a member or members who have researched a company within an industry. The group's members discuss the opportunity and then vote. If two-thirds of the members like the purchase, the treasurer proceeds with the transaction. Some experienced clubs recruit the help of a discount broker to place an order rather than a full-service firm. If members dislike the choice, the cash collected is placed into an account. The members review and analyze studies about investments and select and buy stocks. The members will review their current holdings, goals and participate in an educational program before they adjourn. (For more, see Choosing A Compatible Broker.)

An investment club doesn't have to register with the U.S. Securities and Exchange Commission, but if it did it would need to adhere to the Securities Act of 1933, which allows for the membership interests in securities and those offered and sold to be subjected to federal regulation. The club will also have to follow the Investment Company Act of 1940 which states and the club can exist and be regulated.

What Investment Clubs are Not
Investment clubs are not a get-rich-quick scheme. Joining an investment club doesn't make you an instant millionaire. Members are focused on the long haul.

The members are not all financial experts, attorneys or accountants. They are people with several different career backgrounds. The clubs also differ from professional money managers. They don't encounter requests from clients inquiring about short-term performance. The clubs can take more risk, such as investing in fast-growing small companies.

Benefits of Investment Clubs
Investment clubs have strength in numbers, which means a wide-array of perspectives on a particular stock or market trends. This provides more flexibility to venture into new territories.

Research is divided up among the members, as opposed to putting in a great amount of time in effort on your own. The pooled money provides more purchasing power, allowing the group to put big bucks into profitable investments.

Disadvantages of Investment Clubs
Investment clubs require commitment of time and effort. The club members share their opinions about an investment and you as an individual don't have the final say. Also, the clubs are not immune to scams. In 2009, a federal complaint revealed some members of Homepals Investment Club fell victim to a $14.3 million Ponzi scheme. Three perpetrators promised guaranteed returns of 100% every 90 days. One of the culprits, alleged to have boasted of his trading success, traded no more than $1.2 million of the $14.3 million raised and lost 20% of the clubs funds. (Read What Is A Pyramid Scheme? before investing in any club that promises phenomenal returns.)

Choose a Winning Club
Make sure the objectives are clearly defined before investments are purchased or sold. One of the main objectives should be to double your money every five years, according to the NAIC, but this requires an average 14.9% compounded annual growth rate. This growth rate shouldn't be expected every year, but from one stock market peak to the next.

  • Examine the chain of command.
    The offices usually include a president, vice-president, secretary and treasurer. Some clubs may have an educational officer, a club economist or a stock selection committee.
  • Consider how new members are selected and supported.
    Potential members should realize they aren't playing with the market but learning and are aware of the rewards, risks and responsibilities. The packet of information provided to prospective members needs to include a partnership agreement, bylaws, investment philosophy, critieria for stock research, a sample meeting agenda and description of member responsibilities, according to the NAIC.
  • Education programs are a consistent focus of successful clubs.
    Find out if the members are taking courses conducted by local NAIC councils, reading trade books, subscribing to market-oriented magazines such as Forbes and Better Investing, have had guest speakers visit or attended the annual National Investors Congress of NAIC.

The Bottom Line
Investment clubs can be an affordable way to ease into the stock market and other investments with some help from your peers. Do ask yourself if these are people you're comfortable with as partners in a business. Determine whether all the checks and balances are in place. And, clear your schedule because investment clubs are a year-round monthly commitment.

For additional reading, check out Investment Clubs Pool Assets, Expertise and Get Active, Join a Club!

Related Articles
  1. Home & Auto

    5 Mistakes That Make House Flipping A Flop

    If you're just looking to get rich quick, you could end up in the poorhouse.
  2. Entrepreneurship

    Top 10 Features Of A Profitable Rental Property

    Find out which factors you should weigh when searching for income-producing real estate.
  3. Chart Advisor

    Watch These Stocks for Breakouts

    These four stocks are moving within price patterns of various size, shape and duration, and are worth watching for a breakout
  4. Financial Advisors

    Are Alternatives Right for Your Portfolio?

    Alternative investments are increasingly making their way into retail investors' portfolios. Are they a good fit?
  5. Trading Strategies

    How to Trade In a Flat Market

    Reduce position size by 50% to 75% in a flat market.
  6. Mutual Funds & ETFs

    ETF Fees: Why BlackRock is the Latest to Cut Them

    Low expense ratios are a big selling point for ETFs, but are they being focused on too much?
  7. Markets

    Will Paris Attacks Undo the European Union Dream?

    Last Friday's attacks in Paris are transforming the migrant crisis into an EU security threat, which could undermine the European Union dream.
  8. Chart Advisor

    ChartAdvisor for November 20 2015

    Weekly technical summary of the major U.S. indexes.
  9. Chart Advisor

    Like Ranges? These Are Stocks to Consider

    Whether you want to trade the price fluctuations within a range, or await a breakout, here are four stocks for you.
  10. Financial Advisors

    Vanguard's Target Date Funds: What You Should Know

    Target date funds have grown in popularity as an investment of choice among 401(k) investors. Here's a closer look at Vanguard's offerings.
  1. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  2. Are hedge funds regulated by FINRA?

    Alternative investment vehicles such as hedge funds offer investors a wider range of possibilities due to certain exceptions ... Read Full Answer >>
  3. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  4. How do mutual funds work in India?

    Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>
  5. Can hedge fund returns be replicated?

    You can replicate hedge fund returns to a degree but not perfectly. Most replication strategies underperform hedge funds ... Read Full Answer >>
  6. Can foreign investors invest in US hedge funds?

    U.S. hedge funds are open to accredited investors. When they distribute profits to investors, those proceeds are taxed at ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  2. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  3. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  4. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  5. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
  6. Discount Bond

    A bond that is issued for less than its par (or face) value, or a bond currently trading for less than its par value in the ...
Trading Center