What Is an Investment Club — and Is Joining One a Smart Move?

Investment clubs can be both educational and profitable.

If you’ve ever wanted to start your own mutual fund but figured it was out of reach, an investment club might be the next best thing. An investment club is a group of like-minded individuals pooling their money together and investing it according to agreed-upon principles. In this way, it’s much like a professional money manager investing a pool of capital contributed by individual investors in a mutual fund. However, an investment club is usually more democratic — and fun — with each investor contributing their own opinions and ideas to be voted upon.

To jump ahead and learn more about how investment clubs operate, click on one of these links:

Types of Investment Clubs
Is Joining an Investment Club a Good Idea?
Are Investment Clubs Regulated By the SEC?
How To Start or Join an Investment Club
The Bottom Line About Investment Clubs

Types of Investment Clubs

Traditionally, an investment club is a single entity that buys or sells securities as a collective according to a vote. Not all investment clubs work this way, however. Some are self-directed, meaning that while members still discuss investment ideas and come up with suggestions, each individual member is responsible for investing his or her own personal funds. In this way, self-directed investment clubs are more like educational entities than traditional investment clubs, even though they’re still categorized as investment clubs.

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Whichever type of investment club you’re considering, you should also factor in how each club plans to invest. For example, one club might be all about investing in stocks, while another might focus more on income. Understanding the investment focus of a club is just as important as the type of investment club.

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Is Joining an Investment Club a Good Idea?

Joining an investment club is a personal choice that might or might not match perfectly with your investment needs and strategy. However, it can be a good way to begin investing if you don’t have much money to invest. Here’s a list of some pros and cons of joining an investment club to help you make a decision.

Pros

  • You can avoid unscrupulous brokers by managing own account.
  • You can derive enjoyment from discussing and learning about investments with others.
  • You might see higher investment returns due to the efforts of investment-focused members.
  • It’s a good way to invest smaller amounts like $1,000.

Cons

  • May require regular investment (although this could be a plus to keep you investing consistently).
  • May require regular meeting attendance (can be a plus for those who enjoy the meetings).
  • In traditional investment clubs, you can’t directly control individual investments, which are chosen by committee or collective vote.
  • You might have to pay dues.

Investment clubs can be a great vehicle to ask questions about markets and learn about investments. Each member brings their own level of expertise or research ideas that can be discussed and vetted by the group. But for some people, the demands of regular meetings and requirements to invest according to the wishes of a group might run against their preference for self-direction. For these individuals, a self-directed investment club might be a better option.

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Related: 13 Ways To Invest on a Budget

Are Investment Clubs Regulated By the SEC?

An investment club might seem like a fun, casual organization, but certain types of investment clubs must register with the Securities and Exchange Commission. According to the SEC, clubs must register in accordance with the Investment Company Act of 1940 under the following circumstances:

  1. The club invests in securities such as stocks, bonds or mutual funds
  2. Membership interests in the club are issued in the form of securities
  3. The club does not qualify for any exclusions

If No. 2 sounds confusing, think about it this way: If all members participate in the investment process, then membership interests would not be considered securities. However, if passive membership in the club is allowed, then membership interests might indeed be considered “securities.”

Many investment clubs earn an exclusion to this rule because most are private — meaning they don’t intend to publicly offer their own securities — and they have fewer than 100 members.

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Learn: 7 Best Ways To Invest $100,000

How To Start or Join an Investment Club

An investment club can be an enjoyable social group, but it’s also a business entity designed to generate profits. Joining a club can be as simple as showing up to a meeting and contributing funds. However, to establish one, certain steps should be considered. They include the following:

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1. Form a legal entity.

Many investment clubs are partnerships or LLCs so that members can all be part-owners. Forming a legal entity with rules and bylaws makes the club a legitimate enterprise and can help resolve disputes. Your club will also likely need to file taxes in the form of a legal entity.

2. Hold meetings to determine club objectives, roster members and collect funds.

Initial investment club meetings should be used to record memberships, collect dues and investment funds and discuss club investment policies. The club’s risk parameters and investment style should also be encoded into documents to ensure club members are on the same page and understand how collective funds will be invested.

3. Open a brokerage account.

Your club won’t get off the ground if there isn’t a place to deposit funds and make investments.

Read: How To Invest Your Money in 2019

4. Register with the SEC, if applicable. 

As mentioned earlier, certain clubs must register with the SEC. Consult with a securities attorney or the SEC for further clarification.

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The Bottom Line About Investment Clubs

Assuming you enjoy the dynamics of group investing and are open to the exchange of new investment ideas, an investment club can be a great option, especially for first-time investors. Clubs take an organized and methodical approach to investing, which can help reduce the number of bad investment choices. A club with seasoned investors might come up with investment ideas that you wouldn’t be aware of on your own, and it can teach you the characteristics of a good investment. The important thing when looking at investment clubs is to find one that matches up with your own personal investing style and objectives.

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About the Author

John Csiszar

After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.

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