"What's your opinion of joining an investment club?"
This is a great question. Clubs are a great way to learn about investing and trading. More importantly, they can save you time and money when it comes to gaining real trading experience, which is inline with this sites goal.
You can learn in a pressure free environment, hear a variety of opinions, share ideas and strategies, and even pool your money for greater buying power.
The number one rule for investment clubs is to make sure that you want to follow the group’s investing strategy before joining.
It is one thing to attend meetings and engage in discussions. It is another thing to have money in the market without total control over the decision making process.
Usually, you will reach decisions by committee, which can be frustrating if you do not follow the same investing strategies.
Some have a committee that gathers information on securities and makes recommendations on the most promising candidates. Other clubs rotate these responsibilities among different groups, or even all members.
Either way, most clubs require all members to vote on all trades, as well as any other transactions.
For example, after graduating from college, I joined an investment club with a few friends.
At that time, I was learning the strategies outlined by William O’Neil, founder of IBD. My friends were learning how to invest strictly using fundamental analysis.
Based on their research, they recommended purchasing shares of Enron. Based on Investors Business Daily, I said we should not purchase Enron.
We voted and surprise, surprise, purchased shares of Enron. I probably don't need to tell you how that investment turned out.
That said, these groups take on many different forms. Some just get together to discuss ideas. Others pool their initial investments and split the returns each year (more on that later).
For example, search for Investors Business Daily or CANSLIM (the acronym for Investors Business Daily’s investing methodology) and you’ll probably find a group near you that meets regularly.
Another example are the clubs that play the "Cashflow" board game, which is sold by the author of the Rich Dad series of books, Mr. Robert Kiyosaki.
A self-directed club is similar to the examples at the beginning of this post. Its purpose is to combine time, energy, and knowledge. Individuals make trades in their personal accounts, rather than pooling their capital into one club account.
This type of group may or may not have a written agreement, a charter, or bylaws.
A contributing club is a group of people (friends, neighbors, business associates, etc.) that decide to pool their time, energy, knowledge, AND money to invest in stock or other securities.
And once you add money to the equation, the IRS will want a cut, which requires a little more effort than the self-directed version.
Beware of clubs that have one person in control of the club and its money. Look for different people holding the offices of President, Vice President, Secretary and Treasurer. Having one person responsible for all of the above is potentially dangerous (i.e. the club could be a scam).
On the flip side, make sure that a contributing investment club has less than 100 members. The club may need to register as a private investment company!
You will also want to know if there is a minimum monthly investment. You don’t want to join only to find out later that you can’t afford the payments.
Contributing clubs are usually setup as general partnerships (you will need to verify this, because a club could also be a limited liability company or corporation). As a partnership, the following actions are required:
As a partner, you are required to file a Schedule K-1 with your federal and state tax returns. This will exclude you from e-filing!
The K-1 details your share of the club's income, gains, losses, deductions, and credits. These forms are not complicated, but it may be more of a hassle then some people are willing to endure.
Make sure the club designates someone to create their tax documents. The group may have a CPA or some other person who knows how to create the forms. Otherwise, the club should hire someone.
Before joining, ask for the prior year’s tax return. These documents will tell whether the club is profitable. You may also want to take the forms to your personal tax attorney, CPA, or other financial advisor for review.
The organization has even partnered with brokerages (Scottrade and MyStockFund) to provide special accounts and discounted pricing for members.