Dollars & Sense 101: Investment Clubs

For several decades, investment and financial activities have been reserved for white, middle-aged men who served as stock brokers, stock analysts, entrepreneurs, and traders on Wall Street, the bastion of American economic strength. However, the investment activity associated with American financial markets is no longer reserved solely for men who have direct ties to the corporate sector. Lately, scores of American men and women are participating in Wall Street activities. Moreover, many of these Americans are neither high profile business executives nor corporate tycoons. Rather, they are physicians, attorneys, bankers, engineers, and teachers interested in earning profitable dividends. This recent phenomenon raises an important question: how do ordinary men and women invest successfully in the stock market?

Americans frequently become involved in the so-called Wall Street realm through investment clubs. In an investment club, groups of individuals pool resources such as knowledge, research skills, insight, and funds to make informed, collective investment decisions.

Typically, investment clubs consist of individuals with well paying jobs and substantial work experience. However, a recent trend has been the active participation of young professionals in investment clubs. This trend illustrates that there are no concrete requirements for an investment club member. All that one must have is money, dedication, and a willingness to learn and explore new things. An investment club can be compared to a competitive sports team. The goal of the sports team is to win a game or a championship.

Likewise, the goal of the investment club is to win Wall Street style – earn huge dividends and profits. Furthermore, on a sports team, each member’s solid performance is critical to the team’s success. The success of an investment club depends on the positive contributions of all members. However, the comparison ends here. Success of a sports team requires the precise and careful maintenance of a rigidly defined hierarchy. For example, a football team hierarchy consists of the following: management and organization executives, a head coach, several specialized coaches (i.e. offensive and defensive coordinators, and players. Nevertheless, in an investment club, hierarchy inevitably leads to damaging, counterproductive conflict. Therefore, a thriving investment club requires a delicate balance of powers among the members.

Investment Clubs & College Students: Do They Mix?

Although conventional wisdom dictates that investment clubs are appropriate for those who earn steady incomes, investment clubs are popular among recent college graduates and graduate students. It is not advisable for undergraduates to start investment clubs due to their precarious financial situations. However, for older students, investment clubs are recommended because they enhance financial knowledge and promote social interaction.

Investment Clubs: 7 Steps to Success

According to NAIC Online, there are several essential steps a group must take when starting a club. They are as follows:

1. Find and contact individuals who are genuinely and sincerely interested in forming an investment club.
2. Determine how much money each member is willing to contribute. It is important that contributions be made monthly and that they are uniform within the group.
3. Devise a detailed set of working procedures, rules and regulations, bylaws, policies, etc. Consulting an attorney may be beneficial at this juncture.
4. Discuss the operational framework of the club (i.e. location of meetings, number of meetings, roles of each member, etc.)
5. Contact Office of Secretary of State to inquire about state income taxes and to formally register. Contact IRS to inquire about federal income tax.
6. Read about investment clubs. Members should be required to read investment books and publications.
7. Members should determine if a brokerage service or a credit union is appropriate.