So, You Want to Start an Investment Club?

A Plan to Get You Started!













Presented by Lynn Ostrem




So, You Want to Start An Investment Club?

Do you have what it takes to be in a club?
Do you have a clear purpose for wanting to start or join an investment club?
Do you love to read?
Do you enjoy playing with numbers? Or, are you afraid of them?
Do you have 6-10 hours a month to devote to reading and/or stock study?
Do you have a computer?
How about internet access?

Attributes of Successful Clubs:
They enjoy each other’s company and enjoy communicating between meetings;
They agree on the same investment philosophy;
The club has a buy and hold, growth-oriented strategy;
All members attend and participate at every meeting;
Stocks are never purchased without a complete study;
All members have computers and online service;
The club uses computerized, unit-based accounting;

Types of Investing Styles:
There are traders and investors. Traders are in this for the short term and quick profits. Investors use their portfolios to build their retirement funds, and are therefore, in this for the long term. But within this investor group, there are 3 types:

Momentum Investor: They use technical analysis to gauge price movements. Buy and sell decisions are based on investor sentiment--something very difficult to assess.

Growth Investor: They use fundamental analysis to determine whether a company is a worthy investment, such as growing sales and earnings, solid profit margins, and future business prospects.

Value Investor: They also use fundamental analysis, but they look at different numbers. Value seekers are mainly looking for companies that have very low valuations or that have stumbled. They look for very cheap stocks and signs that they may be coming back.

The Best? You decide. But the most successful clubs prefer to use fundamental analysis to find very good-quality companies, that have growing sales and profits, and that have a future so bright that they can buy them today and not sell them for at least 10 years. Then they hold on through thick and thin--as long as the fundamentals do not change. This is called a buy-and-hold, growth strategy.

How to Choose your Members:
Are they reliable? Will they show up and pay their dues on time?
Are they team players?
Are they willing to commit for the long term?
Do you know if there’s room in their schedules to devote to the club?
Do they travel for work, or will the commute to the meetings be a problem for them?
Would you trust them with your money and your future? Would you want to go into business with them?
Because this is exactly what you will be doing!

The Darker Side of Investment Clubs:
It’s rare that an investment club is a bad experience. Most of them are fun and friendly places to learn. However, here are a few things that can cause the demise of an investment club--and they all center around the members:

Members who fail to pull their own wait (and a club that allows them to stay);
Members who only have a mild interest and therefore do not participate regularly;
Members who fail to show up, or pay on time;
Failure to choose an investing strategy and stick with it;
Failure to research a company before purchasing its stock;
Failure to run the club as a business (as opposed to a social club);
Failure to keep it interesting--with good education;
Allowing (forcing?) only a few members to do all the work;
Failure to keep good records (or audit the books every year);

Getting Legal in Minnesota (All states' requirements are different; use this as a guide):

Types of business entities:
Corporations are taxable entities with a lot of paperwork that require costly accounting practices. General Partnerships allow the taxes to pass through to its partners’ personal tax returns, and therefore, have minimal costs, minimal paperwork, and are preferred by most clubs.

Limited Liability Partnerships are fairly new. Some think that they provide slightly more liability protection to the individual members. But, they are also more costly and require more paperwork.

General Partnerships cost $25 for a 10-year certificate. Limited Liability Partnerships cost $135 per year, plus the cost of accounting services. There are other differences, of course, but the price is usually the determining factor for most new clubs.

Assumed Name Certificate:
Here’s how to get started: To register a General Partnership with the Secretary of State, contact them by phone at 651/296-2803. They can mail or fax an Assumed Name Certificate.

Or, you can print the form from their website at Click on Business Center; click on Forms & Fees. Look for Certificate of Assumed Name. And print. Before you fill out the form, call to make sure the name you've chosen is not taken.

Complete this simple form with the names and addresses of each founding partner, attach a check for $25 and mail to the address provided. Your certified copy will be returned in approximately 10 days. If you prefer, you can hand-deliver the form to their office on the corner of University & Rice in St. Paul, pay $45, and get the certificate issued immediately. This certificate must be renewed every 10 years.

Federal Tax ID Number:
This number will be required for your partnership tax returns, and also by the bank and brokerage firm in order to open an account.

First, you need an I.R.S. form SS-4. You can get a copy at any library. Most have an I.R.S. forms book. You can also contact the I.R.S. at 816/926-5999. Or, you can copy the form from their website.  Click on Businesses, then click on Employee Identification Numbers. 

Apply online if possible since it takes 4-5 weeks by mail.

Publishing Your New Entity:
The State requires that you publish your new entity in the legal notice section of a paper in your county. This could be the Star or Pioneer Press, but the Shopper is less expensive. It must be published for two consecutive issues. When the State returns your certified copy, they will include a notice to this effect, along with instructions. The estimated cost is $60.00.

State Tax ID Number:
Minnesota requires that you file a State tax return for your partnership. This is a short, less-complicated form, to which you must attach copies of your Federal filings. Just as with the Federal return, all State taxes flow through to your personal income tax returns.

Once you have received your State Certificate of Assumed Name, gather the names of all the founding members, their social security numbers, the investment club’s mailing address and phone number (club contact), and simply call the Department of Revenue at 651/282-5225. They will request the above information and provide you with a State Tax ID number over the phone. By the way, you will also need the SIC number (Standard Industrial Code for investment clubs). It’s 6700.

Bank or Brokerage:
In the beginning, it always seems easier to open a local checking account. However, the online brokerage firms now offer check-writing privileges. You decide.

For a local bank, you will need to stop in and pick up a business application, several signature cards, and any other forms they require. After these forms are completed, the bank will also want a copy of the signed partnership agreement, certified Assumed Name Certificate, and a copy of your completed SS-4 Tax ID form.

You can open the account with the checks from your first official meeting. (Minimize your bank charges by looking for small banks or credit unions that offer free small-business checking with NO minimum balance.)

You will have to research brokerage firms on the internet to determine which one is best for you. Start at Gomez Advisers. They score online brokers on several criteria.  My club uses

We are often asked why we use a bank AND a broker.  Here's what I tell them.  My club collects cash tonight and drops it in the night drop. Tomorrow the treasurer contacts Firstrade through its website and has money transferred through our free ACH transfer.  In the meantime, he places our trade(s).  The money usually arrives by midday, which allows our trade to go through during the afternoon trading session.  We get the stock the day after the meeting!

Someone else uses Scottrade. Same price.  Sure, they have banking privileges, but no ACH transfers (at least not the last time I checked).  So his club gathers the checks and mails them in.  It will take 2-3 days for the checks to arrive and 1-2 days to clear the funds before he can buy stock.  That's could mean a total of 5 days (longer over a weekend), and by then, the stock could have traveled out of your buy range.  Something to consider!

Check List

NOTE: Everything you read will tell you to start with 10 to 20 prospective members. My personal experience showed me that organizing a new club was much easier with 2 to 4. When people are new to investing, making the initial decisions can be like the blind leading the blind! It’s just easier when you have a small group to review and discuss the options. The more opinions you have in the beginning, the more difficult it becomes to get a consensus. I recommend that you start with a very small number. Officially start the club. Then, afterwards, start holding informational meetings to entice new members.

1. Find a friend or two to start club. Then READ, READ, READ!

2 Develop an understanding about investment clubs by reading books and perusing websites on the subject.  We listed an entire list on our website at  After everyone has read everything they can get their hands on, schedule your first organizer's meeting.

3. First meeting of club organizers to discuss:
The material everyone read;
Desire to a start club; and
Investing style and/or strategy--this you must agree upon.

Delegate the following for next meeting:
Gather sample partnership agreements, bylaws, mission statements, legal forms, banking and broker information, and any information on investing strategies and club accounting systems. Split up the responsibilities. Each member of the organizing committee should research their respective information and be prepared to explain it at the next meeting. Also, everyone should start considering names for the club and start a list of potential members. Schedule the next meeting two weeks away.

4. Second meeting of club organizers:
Write a Mission Statement;
Develop and/or modify an existing Partnership Agreement;
Develop and/or modify an existing set of Bylaws;
Choose and define officer positions;
Choose and define membership requirements;
Discuss and decide on dues and entrance/exit fees;
Discuss and choose preliminary bank and/or broker;
Discuss and define a preliminary investment strategy;
Discuss and choose a preliminary club accounting system;
Adopt a club name;
Combine your lists of potential members and determine which individuals best fit your requirements;
Write an invitation letter to an informational meeting;
Decide on what literature should accompany the invitation letter;
Select informational meeting date and mail letter and information.
Take a look at the stock education sites and choose a stock or subject for the first educational segment.

It is NOT going to be possible to complete the above in one meeting, so schedule as many organizational meetings as necessary to fully complete these tasks--preferably one week apart. DO NOT RUSH this process!  The better informed you are, the better chance you have of success.

(Note: If you start with a small handful who’ve been involved with the entire process, you can skip to the First Official Meeting. If you choose to add members before the club is formed, mailing out the final draft of the Partnership Agreement and Bylaws will minimize the number of meetings required to get the club started. And keep receipts of all expenses incurred to start the club, including mailings. These can be reimbursed out of the initial funds.)

5. First Informational Meeting:
Prepare a brief introduction. If you mailed out information with the invitation letter, the prospective members should already be prepared.

Be clear on the investing style, and poll them to make sure they agree;
Review the partnership agreement, bylaws, legal information, and membership requirements, as well as fees and dues.
Answer any questions.
Take a vote to see how many are interested.

If there are concerns or changes to be made to any aspect of your original plans, the next meeting will be the Second informational meeting to finalize the agreements and entry requirements. But if no one objects to the original plans or requirements, the next meeting will be the First Official Meeting.

6. First Official Meeting:
Call to order;
Elect officers (Secretary should immediately start taking the minutes);
Vote to adopt the Mission Statement, Partnership Agreement, Bylaws, dues and fees.
Vote on an investing strategy (last chance for anyone to bow out!);
Sign partnership agreement;

Choose and vote on the following:
Regular meeting date, time, duration and location;
Whether to join an investment organization (Manifest, AAII, NAIC, etc.);
Which club accounting program;
Which stock study tools;
Whether to use a bank or broker for bank account;
Which broker to use for stock purchases.
Collect initial payments;
Sign bank/broker forms-signature cards;
Discuss and choose committees;
Provide information and homework for first stock study, or assign reading material such as books or articles for the first education program;
Delegate responsibilities for next meeting and review everyone’s assignments;

7. Between the first and second meetings:
Secretary to file club entity with the State;
Once received, Secretary to handle publishing information;
Treasurer to file for Tax ID Numbers (after name is accepted by the State);
Treasurer to open checking/brokerage account(s) with initial dues;
Vice President/Education Committee to prepare to lead first education program.
Treasurer to purchase/set up accounting system;
Secretary to order other computer programs etc.

Usually, the treasurer keeps the accounting information and the permanent banking and brokerage records, along with a record of the monthly club valuation and member statements and the annual taxes. Remember, you will be filing with the IRS as a business, so you must keep records for 7 years.

The Secretary is usually responsible for safekeeping the original partnership agreement and signature page, the original state and federal certificates, stock certificates if you receive them, a concise record of the minutes of every meeting, along with any correspondence, i.e. resignation letters and letters requesting information from prospective new members.

The Good Stuff

Websites for long-term, buy-and-hold, growth strategies:
Manifest Investing
Bivio - Investment Club Hub

Intro to Investment Clubs - Motley Fool
Intro to Investment Clubs - Investopedia
Doug Gerlach's Club Website

Books for long-term, buy-and-hold, growth strategies:
Take Stock by Ellis Traub (great for beginners!)
Clubs for Dummies by Doug Gerlach
The Beardstown Ladies book series
The Investment Club Book by John Wasik
Investment Clubs by Kathryn Shaw
One Up On Wall Street by Peter Lynch
Beating The Street by Peter Lynch
Common Stocks Uncommon Profits by P.A. Fisher
How to Read a Financial Report by John A. Tracy
How the Economy Works by Edmund A. Mennis
Online Investing Hacks by Bonnie Biafore
Wall Street Words by David L. Scott (dictionary)
Club Favorite! *The Five Rules for Successful Stock
   Investing by Pat Dorsey of Morningstar*
(Some books might be out of circulation.  Check
your library, used books stores or Ebay.  They
are all worth it!)

New Member Packets: (New Member Prospectus) (Introductory Packet) (Membership Flyer) (Information for New Members)

Partnership Agreements: (Club Bylaws)

Bylaws: (Operating Procedures) (Operating Procedures)

Agendas: (Agenda/Minutes)

Stock Study Worksheets: (Education Page; Worksheets) (Annual Report worksheets)

Computerized Club Accounting Programs:  ($99.00/yr inclusive of support, taxes, and AccountSync w/brokers) ($49.00/yr subscription; $49/yr for tax prep)

Computerized Club Stock Study and Portfolio Management Tools: (online - simple!) (free download) (for PCs) (for MACs) (online tools and community)

Education Topics to get you started:
Start Simple!
You can start by having your members buy and read a book, like Take Stock, Investment Clubs for Dummies, or One Up On Wall Street. These will provide fodder for hours of discussion!

Then, consider obtaining stock analysis software and learn how to use it. This alone will take up the first year’s education program. Or, use the online tools at Manifest. The monthly newsletter will provide a well rounded education program, as will AAII's monthly material.  Don't forget to check out the Education Page at for more ideas.

By the time you are ready to move on, you will already have found interesting workshops and articles, either online or in books, that make excellent educational material. Also consider rotating the education program on a monthly basis so everyone gets a chance to participate.

"The best way to learn it is to teach it!"

Finally, where to go for help:

NAIC on CompuServe:
A wonderful place for newbies and experienced investors to meet and find help

If you join Manifest, the forum has a handful of very helpful, experienced investors to help you work through your stock studies.

And you can always contact me! 
Lynn Ostrem