4 Steps For Starting a Successful Investment Club

4 Steps For Starting a Successful Investment Club

Sheryl Ridley-Dorsey started an investment club to teach young men financial responsibility and wealth building.

Sheryl Ridley-Dorsey wanted to teach young men in Lumberton, New Jersey, and the surrounding community about financial responsibility and wealth building. So in 2000, she formed the Black Street Investment Club, a forum for 16 boys between the ages of 10 and 16 to pool their money to invest in stocks. “I saw that schools were not teaching financial literacy and knew that 95% of the decisions we make in life involve money,” says the certified public accountant.

Since then, the group’s investments have grown to $24,000 with investments in companies such as Toys R Us Inc. and ExxonMobil Corp. The boys’ research and select companies they want to invest in, then contribute $20 per month along with money they’ve earned running side businesses such as selling T-shirts and mugs. The largest annual return the club generated was 14.5% before the market crashed. Last year, they had a 9.2% return, compared with a return of 14.09% for the S&P 500.

“Investment clubs are a great way to learn about investments and to get more knowledgeable about the stock market,” says Lanta Evans-Motte, a financial adviser at Raymond James Financial Services in Beltsville, Maryland. Not only do you benefit from doing hands-on research, but also from the research and perspectives that others bring to the table. Investment clubs also provide buying power. Instead of  investing $50 a month on your own, the group can collectively invest $600 per month, giving you more leverage in the stock market.

Here’s how to successfully navigate the process of
starting an investment club.

Assemble an appropriately sized group with a common goal.
Make sure all members are on the same page. “Some people may be looking to make money overnight while others have a long-term focus,” says Evans-Motte. Typically, the ideal objective for an investment club should be focused on steady growth over the long term. When it comes to membership, size also matters. “It should be large enough to get a decent amount of money to work with, but small enough to hold meetings and have discussions with some meaningful input from the members,” says Evans-Motte. Somewhere between 10 and 15 members is ideal. It’s also important to manage expectations: Let potential members know up front they should only join if they have money to invest that they can stand to lose.

Set up the structure and elect officers.
Dennis M. Genord, director of Education and Chapter Development for the National Association of Investors Corp., suggests setting it up as a general partnership because it’s simpler to start up and maintain, and it’s a “pass-through entity,” meaning income passes to the owners and each owner pays taxes on his or her portion of earnings. A partnership agreement contains the purpose of the partnership, the means in which profits and losses are shared, and how the partnership can be terminated. You’ll elect officers, such as president, vice president, secretary, and treasurer, and create operating procedures dictating the duties of officers and expectations of members.

Get tax forms and accounts in order.
The club must submit IRS Form SS-4 to apply for an Employer Identification Number (EIN). In subsequent years, the club must file a tax return (IRS Form 1065). You’ll also file a “Certificate of Conducting Business as Partners” form. Furthermore, each member will file his or her own club tax return using the information from IRS Schedule K-1.

Open checking brokerage accounts.
A checking account is needed for members to deposit money for buying stocks. When the club is ready to invest, online discount brokerages such as Etrade.com and Merrill Edge (www.merrilledge.com) offer lower prices than full-service brokerage firms. An online platform might charge as little as $6.95 per trade, while a full-service brokerage may charge several hundred dollars in annual fees.