How To Set Up And Run Your Own Investment Club
Starting an Investment Club is like Starting a Small Business.
What is an Investment Club?
An organised group of friends, family or work colleagues who meet together on a regular basis and pool their spare cash into a separate entity, namely, an Investment Club and invest the club's funds in the stock market and other investment opportunities. An Investment Club is a legal entity, a partnership governed by the Companies Act 1985 and the Partnership Act 1890.
In the UK, Investment Clubs are best set up with rules and a constitution to ensure smooth running and for the protection of its members.
While Investment Clubs are not charged by The Inland Revenue to Corporation Tax, the individual members of the club are charged to tax on their proportionate share of any income or gains. They are also entitled to relief in respect of any share of capital losses.
The club should therefore elect a Chairperson, Secretary and Treasurer responsible for the administration and record keeping and informing the local Tax Office of the existence of the club. This should be done at the inaugural meeting.
There is no minimum number of members needed to form a club, although many hands make light work, but there is, in the UK, a maximum number of 20 members allowed in each Investment Club. If you find that more than 20 people want to join your club, then you will need to form separate clubs to accommodate them. This is not a bad thing if you are looking to spread risk by setting up contrary investment positions and you all share the same objectives.
Objectives Of The Club:
Investment Clubs are formed with some or all of the following objectives in mind...
- Strength through numbers: The more members you have with spare cash, the more your buying power increases or the more diverse your portfolio. The administrative work associated with running the club can be shared. Researching companies and other investment vehicles can be achieved far easier when you have the manpower to do so.
- The social side: It is important that Investment Clubs hold regular meetings so that the members can insure sufficient progress is being made towards achieving the club's investment goals and objectives, share their views and enjoy social interaction between like-minded individuals.
- Opportunities for education: A well run Investment Club would encourage detailed study of the mechanisms associated with the many types of investment, portfolio theory and management, as well as gaining a working knowledge of the global economy.
- Maximising returns: A common objective might be to create a tool which can help your money work hard for you and show better returns than if it were simply left on deposit.
- Personal development: Increasing net worth, creating a long-term savings plan for yourself, the kick of feeling the pure excitement when things go well.
Whatever the reasons for starting and Investment Club, it's as well to have common objectives in order to measure achievement and create a healthy team atmosphere.
Talk to people you know and even those you don't know but who you hear could bring some expertise to the club. Having close friends as members might make for a relaxed atmosphere initially but if things go badly, there is a chance that you could lose money, club members but worse still, you could lose friends.
You could advertise on your works' notice board or even your local paper. It is very important that you make it clear in your advertising that the club does not offer an investment service of any kind… or financial service regulators might cut up rough thinking you are an unauthorised Unit Trust.
Word-of-mouth, regarded as one of the best forms of marketing, should soon see potential members eagerly offering their
resources… particularly after the word is out that you have managed to complete a profitable trade.
Your ideal membership would comprise a few analytical minds, a good accountant, an experienced captain at the helm, an IT whiz, a good administrator, someone who knows the difference between OEIC's and CFD's and ideally a philanthropic Millionaire for when the market turns against you.
But don't be put off if you can't quite achieve all this, an enthusiastic core membership with the ability and desire to achieve a common goal will take your club a long way.
Members do have a choice as to who they invite in to the club. Discrimination laws notwithstanding, members can set out specific parameters which potential members have to meet in order to ensure the right mix. The next important step is to invite all potential members to an inaugural meeting.
The Inaugural Meeting:
It is now time to start as we mean to go on so the first meeting, usually conducted by the founder members, needs some pre-preparation. Invitations should be sent out to all prospective members giving the date, time and venue of the meeting.
An Agenda should also accompany the invitation and should include the following:
- The election and appointment of the officers of the club: Chairperson, Honorary Secretary, Honorary Treasurer and Auditor.
- Discussion and agreement on the name of the club. Decide on a name for your Investment Club… you will trade under this name and your broker and bank accounts will be under this name. The name might reflect the area you live in, the work you do etc.
- Discussion and agreement of any joining fee and monthly subscription. The joining fee buys a number of Units. Each unit should be valued at a nominal £1.00 so if the joining fee is set at £100.00 for example, then each member receives 100 units and the total fees received constitutes the initial investment capital of the club. Agree a Monthly Subscription of say, £25.00 per member. Issue receipts for monies received.
- Discussion and agreement on the Constitution and Rules which will govern the running of the club.
- Appointment of a Stockbroker and Nominee to hold the clubs shares.
- Where and how the bank account will be set up.
- Agree your investment strategy.
The meeting can take place at a member’s home, a quiet local pub or anywhere that offers a venue without distractions.
A word of warning: It is usual for members to attend meetings with one or two ideas. After hearing the thoughts of ten other members, the one or two ideas they arrived with suddenly turn into ten or twenty ideas. These natural human thought processes are great for creating enthusiasm and progress but it is up to the Chairperson to ensure the meeting isn’t sidetracked and that everybody sticks to the task at hand.
Members should be encouraged to make a note of their ideas and, if members want to hang round after the official meeting, those ideas can be aired and perhaps added to the agenda of the next meeting.
If the Chairperson isn’t firm enough meetings will often run over-time, whatever venue you choose, it is worth ensuring that you will not be asked to leave just as you are about to take a vital decision.
So, a good inaugural meeting is one which ensures everyone knows what is going on, what the club aims to achieve, how the club will be run, which outside companies will be appointed, what responsibilities the members have, that all officials are appointed and all members know what each officer does. Members should also know the frequency of future meetings and when and where the next one is to be held.
You will also know that you have had a truly great meeting if your members leave inspired, enthusiastic and determined to do everything needed to achieve your goals.
A good way of encouraging this enthusiasm and helping the clubs’ cause is to ask the members to conduct research in their spare time and report the findings at the next meeting.
A good Investment Club conducts a good deal of research. Unless you have agreed to choose what equities to invest in by lining up to throw darts at broadsheet listings, you will need to;
- research companies and their market sectors,
- the many different investment vehicles open to you,
- risk and return,
- what portfolio would be best to achieve your overall investment strategy,
- how the markets work,
- how to protect yourself against losses and maximise profits…
The list is very long and research is a continuous process.
What are the duties of the elected officers?
- Finalises meeting agendas, helped by input from the members and secretary.
- He or She is responsible for making sure that all official club notices are sent out to the right people at the right time.
- The Chairperson should help direct operations to ensure that all members stick to the clubs’ rules and constitution to keep the club on track and acting within the law.
- Manages the mechanics of the meetings ensuring that everyone sticks to the points at hand; give everyone the opportunity to speak and may have a second or casting vote when a majority decision cannot be reached.
- The chairperson guides the timing of the meetings by raising for discussion or contemplation, all agenda points, in a structured manner.
- The secretary is responsible for sending out agendas and minutes of all meetings to the membership.
- Record minutes (notes) of what is said and decisions made at all meetings.
- The Secretary should make available to the members, all official documents and reports.
- The Secretary should compile the minutes of the next meeting taking into account any topic put forward by any member who requests that the topic be discussed.
- The Secretary should make sure that the time, date and venue of the next meeting is known to all members and ensures that all resources are in place that will enable a successful meeting to take place.
- The treasurer administers to the clubs finances and is responsible for the accurate reporting of the clubs financial position.
- He or She records all financial transactions and supplies a breakdown of the clubs Assets, Liabilities, Bank balance and Unit Valuations.
- They handle all Tax affairs for the club and ensure that all necessary Tax forms are sent to members so that they can declare any capital gains/losses for the year.
- They compile and present monthly and year end reports covering the ins and outs of the clubs funds in The Cash Account, The Capital Account and The Asset Register.
The role of the Auditor is to check for accuracy and sign off everything the Treasurer has done over the year. These checks include…
- The list and number of shares or other investment vehicles owned as per the monthly Asset Register – taken from the information supplied by your Stockbroker and that the Bank Statements show the outflow to purchase these shares or investment vehicles.
- That the actual share/investment vehicle value-holding is correct as measured against The Financial Times listings at the time.
- That all reported Bank Balances are correct by checking against monthly Bank Statements. (Copies of all Bank Statements should be sent to the Auditor, monthly).
- All Assets should be checked against supporting purchases, sales, capital gains and dividends annually.
- Liabilities such as shares or other investment vehicles purchased towards the end of one month but not paid for until the following month should be checked against the Asset Statements. The reason for other liabilities should be confirmed with the Treasurer.
- Receipts in the form of member’s subscriptions, interest from bank deposits and dividends paid from share ownership etc should be checked For accuracy against Bank and Stockbroker statements.
- Validate and check accuracy of Payments for Shares etc against monthly meeting minutes and Stockbroker statements. Any other expenditure should be checked against supporting documentation and authority given.
- The Auditor should also check all processes for accuracy regarding: Checking the opening balances of units and cash to the previous monthly statement. Confirming deposits or withdrawals to the bank account.
- Agreeing the unit value to the assets statement of the previous month.
- Checking the calculation of units bought/sold. Checking the calculation of the closing balances of units and cash. Checking all the totals of the columns.
- Confirming that the total value of the investments appears reasonable (a full valuation is only performed annually or on a member leaving the club)
- Checking the bank balance to the balance on the cash account.
- Confirming other assets/liabilities are small or relate to shares paid for in
the following month
- Checking the additions to give net assets of the club
- Agreeing the issued units to the total of the members capital accounts
- Checking the calculation of value per unit.
So, as you can see, the role of the Auditor involves quit a lot of work. You might like to elect a couple of members to do the auditing but they must not be any of the elected officers. But if all financial tasks are run efficiently and completed regularly and all information is passed to the Auditor swiftly, the entire Auditors’ checks can be completed with the minimum of fuss.
The Investment Strategy Committee
Your Rules or Constitution may state that your club should form an investment strategy committee. This committee is formed to take investment decisions between meetings. Reasons for these investment decisions could include:
- The sale of underperforming equity or other holdings.
- To act quickly on buy, hold or sell recommendations from your Stockbroker or other information source.
- The discovery of an investment vehicle that would compliment your portfolio or increase the chances of success of your overall investment strategy. As with all elected officers, Club rules normally insist on re-election every year, but do not normally prevent any one individual from holding position in successive years. The Clubs that work best are those where members find roles that they are comfortable with and which fit their skills.
Now you have set up your Investment Club, you need to begin trading.
You need to decide your ‘Investment Strategy', consider your ‘Risk Profile' and research all the many ‘Investment Vehicles' available to you.
Your members have to learn how to manage your portfolio of investments; this is where they really earn their crust. They have to consider trading tactics, whether you are after a quick buck or more intent on building wealth over the long term.
Members Leaving The Club
The first step the member should take when resigning is to submit his/her resignation, in writing, to the Chairperson, Treasurer or Secretary of the club.
As resignations become effective at normal monthly club meetings, members should submit resignations not less than one week before the next meeting.
Part of the Treasurers duties at each meeting is to declare the value of each unit in distribution based on the mid-price of the clubs holdings published the day before.
Members resigning from the club shall sell back to the club their entire unit holding and receive the payment as soon as practicably possible thereafter, but no later than, 90 days.
The reason resignations are made at meetings is that the most up to date value of their unit holding can be made.
The same process applies to members who have been voted out of the partnership by a majority.
Winding Up The Club
When the club is wound up at the Annual or an Extraordinary General Meeting, the total assets of the club, less any payments of club expenses, is divided by the number of units issued. This gives a value of each unit. Members receive the unit value multiplied by the number of units they hold.
Remember your individual Tax liabilities and capital losses.
For Further Detailed Information
We have written a step-by-step guide for your e-reader, covering all aspects of starting and running an investment club. It can be found at the Kindle Store for £8.04 or $9.99 by following this link... https://www.amazon.co.uk/dp/B005Q0C7PU It gives you everything you need including all the tax forms and investment strategy outlines. It lists investment vehicles and goes into the details of pricing units and keeping full accounts. It also includes a 25 stage checklist covering all the required steps to ensure that you don't miss anything important.