Maybe you and your coworkers spend breaks discussing the market or you’re always texting friends about financial moves. Maybe all of you are huge Warren Buffett fans who want to model your own decisions after his investment strategies—or maybe you want to raise capital to buy a specific stock. Whatever the reason, you may be thinking about starting an investment club.
What is an Investment Club?
An investment club is a novel way for people to come together and help one another reach their shared financial investment goals by discussing those goals and working together to make them come to fruition. Talking through what-ifs, gathering advice, and learning from other people can be one way to broaden an investor’s knowledge base and alert them to popular investment trends, like investing in cryptocurrency or impact investing.
Typically, an investment club can take on one of two forms, depending on the interest and goals of club members. Some investment clubs pool their money so that the group invests as one unit. Other investment clubs, sometimes called self-directed investment clubs, meet to discuss strategy or invite speakers to share on various topics, but each investment club member invests independently.
For investors who decide to pool resources and invest as a group, it’s important to understand any regulations and guidelines. Depending on the structure of the investment club, it may be necessary to register with the SEC as an investment company, and it may be smart to set up the investment club as a legal partnership.
Step 1: Decide On The “Why”
The first step in starting an investment club is figuring out the purpose of the club. Understanding and agreeing on the motivation behind the investment club can help like-minded members craft a mission statement and bylaws.
There are many reasons for starting an investment club. Some people want to pool their resources and enjoy the camaraderie that comes with a mutual goal. Others want to explore specific areas, such as impact investing or invest in alternative investments, such as startups or mineral rights. There are any number of reasons to start a stock investment club.
A frank discussion can help narrow focus and weed out members who might be happier in a club with different goals. These discussions can also be a good time to discuss the financial commitment of the investing club. Some clubs may have annual membership fees used for club expenses such as speakers, meeting space, and supplies, as well as a monthly expected contribution to earmark for investing.
Step 2: Observe Existing Groups in Action
Once you’ve decided on the “why” of your club, it can be helpful to see a few investment clubs in action. An online search may help you find clubs in your area. There also may be “model clubs” that are open for observation. (Better Investing , a national nonprofit, has listings for investment clubs around the country.)
Pay attention to how these club meetings are run, including the format and structure (guest lecturers? Casual, open conversation?). This will give you and members of your club a sense of how you’d like your meetings to go.
Step 3: Kick Things Off with Informative Sessions
Before getting deep into group investing, it may be helpful to have several investment club meetings without pooling funds. These club meetings can include a speakers series or an open forum opportunity to discuss approaches to the market, and can be a good way to assess whether or not taking the next step and forming an investment club makes sense.
Step 4: Create a Legal Framework
Many investing clubs operate as a business entity, either as a Limited Liability Company (LLC) or Limited Liability Partnership (LLP). It can be helpful to create a legal framework for your investment club that clarifies and addresses specific financial questions, including:
• Will returns be reinvested or distributed to members?
• What happens if someone decides to leave the club?
• How will investment decisions be made?
The answer to this last question may also change whether or not your investment club needs to register with the SEC. For example, if you have one club member making investing decisions, or one club member providing investment advice to the rest of the club, that person may need to register as a financial advisor with the SEC. There may also be state-specific securities requirements that a club may need to comply with.
You may also want to make sure you have a clear understanding of tax implications of investments. Creating membership bylaws, even if your club is an informal group of friends and acquaintances, can help make sure everyone is on the same page and there are no misunderstandings about financial club commitments and club purpose.
Starting an investment club has the potential to be rewarding in many ways: It can be beneficial to develop and discover investing strategies with peers, and in some cases pooling resources to invest together can bring members closer to their individual financial goals.
For investors who don’t have the bandwidth to start up a self-directed investment club, there are other options. Talking stock tips at the water cooler is one classic strategy, but another option is to join platforms that allow you to “watch” the investment moves your peers make in real time.
For example, SoFi’s investing platform allows you to follow people’s investment moves. This opt-in app feature hides actual dollar amounts, but allows you to view watchlists of other participants, view people’s SoFi Invest activity, and see your own investments play out on a dynamic leaderboard. This can be a way to actively participate in the market together, while keeping your finances separate.
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