An investment club is a self-managed group of people who pool their money to invest together. Each member may help make investment decisions.
What Is an Investment Club?
Investment club members may hold educational meetings where they study different investments and make investment decisions together. The group might buy or sell based on a member vote.
While the Securities and Exchange Commission (SEC) does not regulate investment clubs specifically, some club activity can fall within the purview of the SEC, which lays out a basic structure and rules for clubs. For instance, if the club invests in securities, it must register with the SEC under the Investment Company Act of 1940.
- Alternate definition: Self-directed investment clubs let members research and select investments together, but each member invests their own money individually. Funds are not pooled.
How Investment Clubs Work
Not all investment clubs will have the same structure, but here are some general guidelines for forming and joining an investment club:
- Investment clubs will usually form a legal entity, such as a partnership or Limited Liability Company (LLC). This way, the members can be considered joint owners of the entity and their financial contributions can follow standard accounting rules.
- There's no real minimum or legal limit for the investment club membership but one club usually consists of 10 to 20 members.
- The investment club will usually open a brokerage account in the name of the club, as established by the name of the legal entity. Some brokerage firms have certain rules and incentives for investment clubs, so be selective and shop wisely for the right fit.
- To join the investment club, a new member will usually contribute a lump sum, then pay a set monthly amount, such as $100.
- Members will normally meet periodically, such as once per month, to discuss investment opportunities and which, if any, securities should be bought or sold.
- It can be advantageous for investment clubs to have a stated investment objective or investing style, such as value investing or growth investing. Members can also set up particular screens that securities need to meet before they qualify for purchase. For example, a value strategy might require a low P/E ratio before the investment club purchases it.
In some cases, investment clubs can be compared to mutual funds, which are investment securities that enable investors to pool their money together into one professionally managed investment. Mutual funds can invest in stocks, bonds, cash, or a combination of those assets. Investment clubs can do the same thing; they are just managed by the group instead of a fund manager.
Perhaps the greatest benefit of joining an investment club is education. When several investors come together to share ideas and information, there is often a synergistic effect, where the sum of the parts is greater than the whole.
Each member of the investment club can add value and share it with all the other members—translating into potentially higher returns than any one individual would have achieved.
Also, when you join an investment club, you can avoid the fees and commissions of investment advisors or stockbrokers.
if there are passive members in the investment group, their membership may be considered an investment in a security. The membership would be considered a contract and since they are not participating in the management of the investment club's chosen securities, the passive members are similar to shareholders of mutual funds. In this case, the investment club would need to register with the SEC.
What Are the Risks of Investment Clubs?
An investment club will only be as good as its members. If you have no experienced investors in the group, you're unlikely to succeed. The club's outcomes will also hinge on how actively everyone in the group participates in the investing decisions.
Before you trade the experience of a fund manager for a collective effort, be sure you have a committed group with enough experience to make your investment club worthwhile.
- Investment clubs allow people to pool their knowledge and funds to make investments.
- The primary benefits are education, savings on management fees, and the chance to get better results than you would on your own.
- You may need to register your club with the SEC, depending on how it operates.
- A group's odds of success depend on the investment experience of the members.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.