May 2: The Benefits of Using an Investing Club

by David Jenyns on May 2, 2007

For most young people, whether in college or just starting out, the idea of investing in the stock markets can be daunting. The process may seem confusing, overwhelming and something for real grown-ups. It is important, however, for young people to start investing wisely in order to secure their financial future. One method of familiarizing yourself with the stock market and its concepts is to join an investment club.

There are two main types of investment clubs. The first is mainly concerned with teaching about investing and the concepts of the stock market. They use simulations rather than real money to illustrate the way that the stock market works. You can learn the principles before you put any of your hard earned money at risk.

Virtual investment clubs simulate actual trades and trading stocks. These virtual clubs are like an investing “school.” There are several websites available for testing out stock market principles such as MarketWatch’s Virtual Stock Exchange. The Virtual Stock Exchange performs market simulations.

Many universities are establishing virtual investment clubs for the purpose of teaching stock market strategies. It provides students with a familiarity for financial terms and the financial institutions available to help them.

Virtual investment clubs can also learn many things beyond investing to learn about the way the stock market works. Many clubs host investment relations representatives to make presentations at their meetings. Brokers are also excellent guests at club meetings for speaking about how brokerage firms work and networking with club members.

Other topics to consider for a virtual investment club are discussing current events and their perceived impact on the market. Studying the Wall Street Journal and learning to find and read the stock market pages is another skill acquired in this type of investment club.

The second type of investment club is the type that actually puts forth money into the market. Their purpose is to pool the money of the group so the members have more leverage in the market than they would if they had invested individually. The investment clubs that actually put forth money form a legal partnership between the members so that each member is protected.

To start a legal investment club, each member fills out partnership agreements. The documents are available from the National Association of Investors Corporation (or NAIC), which is a non-profit organization. Belonging to the NAIC is also recommended because the organization provides special services. The NAIC charges $40 for the establishment of the club plus $14 per member, per year. There is NAIC Club Accounting Software available to keep everything in order for $159.

The investment club will then open a brokerage account with a firm of their choice and appoint a treasurer for the club. The treasurer will maintain and report tax information to each individual member so all members are well informed of what is going on with the club’s investment. This also allows each member to report their share of the club’s earnings and pay their portion of taxes.

Investing with a club has several advantages. When you are part of an investment club, you are able to get different perspectives on a variety of stocks. Each investment is a group decision and this allows for a broader input on the stocks that are invested in. The club benefits from the variety of experiences and knowledge of the group. Each member gains a broader understanding of the market by hearing which stocks appeal to certain people. The investment club also allows investors to spread their money out over a variety of stocks and therefore, own a portion of many companies.

On the average, investment clubs have 12 to 16 members with each person assuming a different role in the club. There needs to be a president of the investment club to plan and arrange meetings. The vice-president is responsible for helping to run the meetings. A secretary is helpful in taking minutes for the meetings, which helps establish a record for the investment club. The other members of the club are responsible for researching and bringing information regarding different stocks. Most clubs meet once a month to discuss the investments and hear new stock investing ideas.

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