Investing Unit 9: Investment Clubs

• Introduction
• Unit 1: Basic Building Blocks of Successful Financial Management
• Unit 2: Investing Basics
• Unit 3: Finding Money to Invest
• Unit 4: Ownership Investments
• Unit 5: Fixed-Income Investing
• Unit 6: Mutual Fund Investing
• Unit 7: Tax-Deferred Investments
• Unit 8: Investing Small Dollar Amounts
• Unit 9: Getting Help: Investing Resources

• Investment Clubs
• Investing Resources
• Investing on the Internet
• Summary
• Resources
• Action Steps
• About the Author

• Unit 10: Selecting Financial Professionals
• Unit 11: Investment Fraud

• Study Guide
• Action Steps
• Monthly Investment Messages
• Glossary

Why start or join an investment club? There are basically three reasons to join an investment club—education, fun, and potential financial gain. The club hopes to do well and make profits; however, financial gains are not guaranteed. Clubs provide a social atmosphere that makes learning about investing fun. Investment clubs differ from other clubs, however, in that individuals are not merely members of the club but are “partners.” Typically, there are 10 to 20 partners in a club. Partnership agreement forms are filed and guidelines are established for the club. Guidelines include how much and how often partners must pay fees to the club and how to withdraw funds paid in and profits made. Guidelines are also set for the order of business at each meeting. A typical club meeting will have an update from the treasurer, an educational program, a presentation by partners presenting stocks or investments to buy, and updates from partners who are “watching” the club’s current investments.

Advantages of an Investment Club

Clubs require “dues” in the form of a set payment. These payments, typically $25 to $100 a month, are used by the club to buy stocks, bonds, and other investments. Regular payments such as monthly dues may make it easier for you to set aside money for investments. Like paying a bill each month, you’ll write a check to the club for investing. The clubs function as a learning environment with partners taking turns giving educational programs and presenting stocks or other investments to study and to consider for purchase.

Disadvantages of an Investment Club

There are also some disadvantages to investment clubs. Financial decisions must be made year-round. For that reason, investment clubs differ from many clubs in that they must meet throughout the year. The stock market closes for only a few national holidays and certainly doesn’t take an extended summer vacation. These clubs require a commitment by partners to attend meetings, hold offices such as president, secretary, and treasurer, and present educational programs. Just like any group of individuals, you may not always agree. Many clubs decide what to buy and sell with a simple vote, with the majority ruling. If you join a club, be prepared to accept decisions made by the majority of the partners even if you disagree with the investment decision.

Each investment club will establish procedures for operations such as how often to meet and where, how much dues to charge, how new partners join, the minimum time to stay in the club, and how to pay out partners who must leave the club. Clubs must also establish criteria for investments and decide how to diversify the portfolio. The club will decide if a portion of their club’s investments will be speculative or somewhat risky in nature, conservative, or growth or income oriented. Clubs may also set a policy as to what portion of the investments will be in stocks, mutual funds, or bonds, as well as set criteria for buying and for selling. Most clubs, however, know that regardless of general market conditions, funds will be fully invested, and not held in cash.

Investment clubs may also establish policies about what kind of industries or companies they will not include in their portfolio. For example, the club may decide not to invest in stocks of tobacco or liquor manufacturers. The club may set a policy to invest in companies that are environmentally friendly. Criteria may even include how the company treats employees or the number of women and minorities in key leadership positions.

Sources of Information for and About Investment Club Investing

Investment clubs themselves use a variety of sources to obtain information about stocks, mutual funds, and bonds. Clubs or individual members in the club may choose to subscribe to the Value Line Investment Survey, business periodicals, and magazines. The Value Line Investment Survey provides analysis of the information contained in the annual reports of a company. The analysis includes a look at the company’s financial history, current financial health (debt), and future prospects. Public libraries often subscribe to Value Line Investment Survey and other resources. They also may provide access to the Internet. Investment clubs will sometimes work with a broker who provides educational information, holds funds in the investment account, and buys and sells investments as decided by the club membership.

Companies file regular reports with the U.S. Securities and Exchange Commission (SEC), obtainable on the Internet. Companies publish annual reports in a slick, magazine-length format to give to shareholders, the media, and interested investors. Financial charts in the form of a balance sheet inform investors of assets — things of value owned by the company — and liabilities — claims against the firm, such as debt and taxes. The income statements contained in an annual report can help investors understand the profitability of the company over time.

Investment clubs may choose to have a stock selection committee. This committee, representing a few partners, will do the initial research on potential investments, follow the established club criteria or policies, and present the stock for consideration to the group. They may choose to use the Stock Selection Guide^© which contains evaluation methods developed and provided by BetterInvesting (formerly known as NAIC or the National Association of Investors Corporation). In every issue of BetterInvesting magazine, a company is profiled using the Stock Selection Guide^©. If you want to join an existing club in your area or if you want to start an investment club, BetterInvesting is a good place to start.