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Financial Literacy: What to Know Before Joining an Investment Club

How to juggle school with work
How to juggle school with work

What is an investment club?

An Investment Club is a group of individuals who come together to combine funds mostly for the purpose of investments, and with positive returns as an outcome. These members typically meet on a periodic basis to make investment decisions, mostly through, a voting process and then proceed with their investment objective(s). Investment Clubs are an excellent way of reducing the risk of financial losses, in the case of a bad investment decision, and are also good ways of meeting new friends and learning of new investment opportunities that exist and having a means of easily taking advantage of them.

Although people have been investing in groups for thousands of years, the world’s first investment club was allegedly established in Texas in 1898 back in the Wild West when few investments could be considered safe. Investment clubs were seen as an ideal way of spreading the risk away from just capitalizing in cattle farming, the popular business at the time. And one of the major reasons people, particularly Americans come together in investment club is to learn how to or other ways of investing their own personal monies outside of the group.

It is important that each Investment Club have ground rules, strict laws that must be abided by each and all members, a solid strategic business direction and firm investment objective and procedures otherwise its objective could be defeated from the get–go. Usually Investment Clubs do not have to be legally registered or offer or sell membership slots to interested persons, but most do and since each club is unique, each should, for best practices register at least as a private entity, a social club or find ways to abide by some statue governing the laws of the land which it finds itself.

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Investment Clubs can invest in next to anything, both legal or (believe it or not, illegal). But the most popular, legal, vehicles are shares (stocks), mutual funds, bonds, treasury bills, property, junk bonds and direct investment in ownership of companies. However, other Clubs have been known to stake in big oil and gas deals, farming/agricultural projects, next–generation pharmaceutical and/or medical solutions, weapons manufacture and sale, to mention but a few.

How to join an investment club

Joining an Investment Club may require a connection to an existing member or a vacancy in the club, but any group of individuals may start their own investment club. The process includes finding a group of like-minded investors, registering it with state and/or federal government, obtaining a taxpayer ID, and holding regular meetings. The investment club should also open a brokerage and banking account and maintain organized and strict banking and accounting procedures.

Investment Clubs are commonly formed as partnerships or limited liabilities, and investment income and/or losses are consequently passed through to its members through monetary or physical terms as agreed by its members.

Contributions into investment clubs

Some Investment Clubs are gender or age specific and members may be required to make an initial minimum investment and then make regular contributions as agreed in its membership terms and conditions. Often, but not always, each member of the investment club contributes the same amount of money and is expected to do so periodically. Members are often always free to invest outside of the club, which makes an investment club a good way to diversify a portfolio.

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Club meetings are usually held monthly but some Clubs meet more frequently, and most meetings involve reviewing existing investments, taking deposits for new investments, selecting new investments opportunities, and on some rare occasions, as a festive gathering. Members personally research existing and potential investments, and the group is often able to conduct more thorough research as a team than each member could do individually. A majority vote is normally required to buy or sell an investment, making it one of the safest investment options known to man.

By Brain Essien as published in Nairametrics

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