investment club

How Does An Investment Club Work?

For beginners looking for a hands-on way to learn more about investing, an investment club can be a good place to start.

An investment club is a group of people who invest money together, typically in stocks and bonds (or, alternatively, it may be real estate or business investing). The goal of these groups is to make money, but a valuable side effect is that members learn more about investing in the process.

Members make investment decisions as a group, often meeting together periodically. They can either pool money together and invest as a group or may use meetings to gather information and invest individually.

Legal Issues—Before You Start An Investment Club, Know This:

Before starting or joining one, it’s important to note that investment clubs come with legal guidelines and tax implications. For one, some criteria may mean a club must register with the SEC (for example, one with over 100 members). Investment clubs are also limited to a $25 million upper limit in the U.S.

Members should also be aware of the tax implications of joining an investment club. In the U.S., members may have to file specific tax forms as result of membership. There is accounting software specific to investment clubs that is designed to help with this.

Want to pull out of the club and take your money early? Many investment clubs apply a penalty fee for doing this, so you may be walking home with less than you put in.

Who Should Join An Investment Club? (Who Should Not?):

Investments clubs are good for beginner investors, especially those who want to bypass the cost of a financial advisor. However, they may not be the best choice for more knowledgeable investors, since investment clubs are usually designed democratically. In other words, individual members won’t have total control of investment decisions if money is pooled together and voting is communal.

Investment clubs are also, by design, better for investors with longer time horizons since group decisions can only be made periodically (typically once a month or so) when the group convenes. As a result, multi-year time horizons are best suited for these clubs.

The Bottom Line:

Investment clubs can be a great way for beginners get started and learn more about investing.

Harnessing the collective knowledge of members of diverse background and opinion can be a great benefit for investment clubs—but it can also be a liability if the prevailing wisdom of the group turns out to be wrong.