You can start a stock investment club by walking through these 10 steps, from finding potential fellow club members to forming a partnership agreement to meeting to make investment decisions.
Investing in the stock market is easier when sharing investing ideas and pooling investments as part of an investment club. For over 60 years, BetterInvesting has helped more than 5 million people become successful investors by demonstrating how to actively invest in stocks and manage a portfolio of stocks in an investment club. Our organization is a community of like-minded investors who have gained from the experiences of others and are eager to share their experiences with you.
Below are 10 steps for starting an investment club, including how to find potential members, what a partnership agreement is, where to find investment ideas and how to make investment decisions. After you start your club, you'll need some rules for thumb for operating it; read 10 Tips for Operating a Stock Investment Club for more information.
Step 1: Find Potential Members for Your Stock Investment Club
Search for like-minded people who have the same interest and desire about investing in stocks as you and who are committed to applying the BetterInvesting stock selection methodology in running a profitable investment club.
Investment club members can’t successfully make investment decisions if they’re divided between long-term investors who are committed to following BetterInvesting’s principles and others who are determined to act as traders, moving in and out of the market or following other investing strategies. Take the extra time up front to find the right mix of people who you believe can come together, organize as a club and manage a profitable portfolio of stocks.
Step 2: Hold Meetings With Potential Members to Organize
The initial club meetings held will be organizational ones. During these meetings the roster of investment club members is established, club officers are elected and the club startup activities found in steps 3 through 8 are administered. Schedule investment club meetings every two weeks to keep the process moving and aim for a total of four organizational meetings to get your club up and running.
Download the investment club application, fill out both the club registration section and club member enrollment sections of the form and send it to BetterInvesting.
Step 3: Form a Legal Entity and Create a Partnership Agreement
Now you need to establish yourselves in the eyes of the government. To determine which type of legal “business entity” is best for you, carefully review the upside and downside of each one. BetterInvesting resources include descriptions of the various types of business entities.
Most clubs prefer general partnerships, since they allow the taxes to pass through to the partners’ personal tax returns and are the least costly business structure. Investment clubs starting up that join BetterInvesting typically adopt the general partnership agreement developed by the Mutual Investment Club of Detroit — one of the organization’s founding clubs. A copy of that club’s partnership agreement is available to BetterInvesting members.
BetterInvesting suggests you review this agreement and use it to develop the partnership agreement for your club. Remember, your club can modify the agreement at any time in the future and should not let developing the agreement become a barrier to moving forward.
For a general partnership, file a “Certificate of Conducting Business as Partners” form, known as a “Doing Business As (DBA),” with the county or state. Registration requirements vary from state to state and for that matter, county to county. Have your club secretary or treasurer contact the Secretary of State’s office or licensing board, as well as the office of your local county clerk.
You’ll need a federal tax ID number for your partnership tax returns and for your club’s bank and brokerage firm. You need IRS form SS-4 for this step.
Step 4: Establish Club Operating Procedures
Now you need to establish the club’s day-to-day operating procedures. Like the partnership agreement, club members should review the operating procedures periodically to ensure they represent how the club wants to work.
Step 5: Open a Brokerage Account for Investing in the Stock Market
Club members will need to conduct some research when selecting a brokerage account. There are several types of brokerage accounts. If your club requires more services and support, you’ll pay more. If you can live with minimal services, you’ll pay less.
Your club should strive to keep costs associated with your stock investments to a minimum to maximize your returns.
When club members pool money and make investment decisions, the club treasurer can endorse member checks over to the club’s broker and can also write checks on the brokerage account to pay club bills. Clubs may also consider establishing a business account at a local bank; they can use this account to deposit member checks and send a single club check to the broker, parking the leftover funds until needed.
Step 6: Establish Club Accounting Procedures
Club members will need to determine the accounting method your club will use to ensure that each member’s share of club funds is accurately recorded and reported. As a club, you need to come up with a process to track every cash transaction and to calculate every member’s share of the whole.
The club accounting system BetterInvesting developed has been time-tested by tens of thousands of clubs operating as partnerships. Investment clubs can hire an accountant (expensive), use manual or spreadsheet bookkeeping (time-consuming), or purchase online or desktop accounting software (easy and efficient).
No matter which method you choose to use, the treasurer is ultimately responsible for club recordkeeping. But we highly recommended that all club members become somewhat familiar with the process.
Step 7: Have a Structure for When Clubs Meet
BetterInvesting studies confirm that club meetings that are well-run and organized consistently lead to superior investment results. If you’d like to see for yourself, sit in on a model club meeting held by your local chapter.
Organization begins with the meeting agenda. It should be emailed to each member before to the meeting, along with an official invitation and the minutes of the previous meeting. This allows club members to hit the ground running when the meeting begins. It also ensures that the meeting will be run according to a plan and instills in each member a sense of professionalism akin to what they find in their job.
BetterInvesting's free resources for clubs
include guidance on how to operate your stock investment club.
Step 8: Establish the Education Program for Club Members
The educational component of an investment club is essential to the continued learning and building of investment knowledge and experience. Each month, your club should dedicate appropriate time to investment education. Among our many educational resources, BetterInvesting provides suggested lessons for your club’s first two years. Include your own material and information to supplement the educational experience for all members.
Step 9: Join BetterInvesting for Investing Ideas
BetterInvesting registration and investment club member enrollment is the next step to forming your investment club. With BetterInvesting membership your club can tap into our resources for starting and operating a club we’ve mentioned above, draw on support from our expert volunteer community and use our tools and resources for studying investing ideas and making investment decisions. Learn more about some of the benefits of membership from our brochure.
Step 10: Apply Sound Principles for Making Investment Decisions
BetterInvesting is dedicated to teaching you how to become a successful strategic long-term investor by helping you become more invested in the process of making your own basic financial decisions, and by providing you access to the information you need to do it.
Remember: Building investment knowledge and experience is the ultimate key to long-term investment success for your club and its members. By learning the BetterInvesting stock selection methodology and how to apply it using the BetterInvesting online stock selection tools your club will be on the path to creating and managing a profitable stock portfolio.
Adam Ritt, Former Editor-in-Chief of BetterInvesting Magazine, joined BetterInvesting in 2002 as the managing editor of BetterInvesting Magazine and was overseeing the content creation and production of all BetterInvesting print and online publications. His BetterInvesting Magazine articles frequently were reprinted in various publications. Adam’s article, “World of ADRs," is currently being used for a 400-level accounting course at the University of Washington.