How to set up an investment club
Researching companies and monitoring your portfolio can be a lonely business. Not only do you spend your time alone with your computer, but you're responsible for every single idea or lead you follow up - and there's no Mr Sensible across the desk to take a rational view on your current enthusiasm for tech stocks or wind farms either.
So could an investment club expand your horizons?
Investment clubs are groups of up to 20 people – friends, family or colleagues – who get together to pool money and trade ideas in order to invest in the stockmarket.
Each member makes an agreed monthly contribution (which may be anything from £10 to £100 plus). Regular meetings take place, often in the pub or at work, at which members discuss the performance of the portfolio and decide where they are going to invest next.
Clubs can provide existing investors with both a social angle and an opportunity to share ideas from a wider range of sources. Financial journalist John Harrington, for instance, teamed up in 2001 with a group of friends working in various capacities in the City.
"The theory was that with all our knowledge we'd clean up – and we did beat the FTSE by 4% over the past 10 years," he observes.
But an investment club can also provide a great way into the markets for novices nervous about taking the plunge on their own. "Clubs are often started by someone who already invests and finds other friends or colleagues expressing interest in having a go themselves," says Dave Jeal, head of product management at broker Selftrade.
It's a two-way benefit. Experienced investors are able to share their know-how with beginners – but those beginners also bring their own specialist expertise. For example, a doctor may have up-todate insight into the pharmaceutical sector, while someone working in IT could be well placed to identify good technology companies.
Even hobbies, interests or day-to-day chores such as supermarket and high street shopping may help to make people more informed about a particular sector.
"Clubs are a fantastic way to get ideas from people with a real mix of backgrounds, and increase your investment experience," says Guy Knight, sales and marketing director at The Share Centre – himself chair of a successful club for the past 14 years. And you learn in the club tends to be applied in your private investing too, he adds.
How do you go about joining an investment club?
Recruitment tends to be via the grapevine, rather than through formal adverts, so if you want to find an existing club you'll need to put the word out.
The alternative is to start your own with friends or colleagues. If you do so, you'll need to decide the obvious details, including who you'll recruit, how often and where you'll meet, how much each member will pay each month, and whether to contribute some extra ‘seed capital' at the beginning to get the investments going.
"There are only six of us putting in £83.30 a month (£1,000 a year), and we just meet every two or three months in the pub these days, because we rarely sell and so don't have a lot money to invest each month," says John Harrington. In contrast, Knight's club, currently 11-strong, has had up to 17 at its peak.
The next job is to write a proper constitution document outlining the purpose of the club and the broad basis of its operations, and draw up its working rules.
According to Danny Cox, head of advice at Hargreaves Lansdown, these will typically include details of subscriptions, joining and leaving procedures, attendance at meetings, what to do in case of disputes, the voting majority needed for a decision to be made and what happens if the club is wound up.
All of which may sound a bit bureaucratic – but in reality it's generally far from formal. Indeed, as Knight observes: "You're not likely to look at the rules a lot, and if you do have to fall back on them then something must have gone horribly wrong."
Jeal suggests using the draft document available as part of the Proshare Investment Clubs Manual (proshare.co.uk) as a starting point, and adapting it to your own circumstances, though he warns that some of the guide is "well out of date".
At the first meeting you need to appoint some officials: chairperson, secretary and treasurer. "In many cases members' contributions include the cost of food and drink for each meeting, but other clubs go further, organising special events and also get-togethers with other investment clubs," Jeal adds.
Set up club accounts
Another job is to set up an investment club bank account, into which members will pay monthly contributions (and any initial one-off payments), and also to decide upon an execution-only broker such as Selftrade (selftrade.co.uk), The Share Centre (share.co.uk) and Hargreaves Lansdown (h-l.co.uk).
The trading account is opened in the name of a nominated individual and a back-up (typically the chairperson and treasurer), so only they can buy or sell shares. They may also receive information from the broker on portfolio holdings to circulate to members.
What about tax?
To start with, the treasurer should notify the local tax office of the club's existence. They will be invited to make returns for the club, and on confirmation they'll be sent copies of the relevant forms – the Standard Form of Agreement (SFA) and Form 185.
"It's the treasurer's responsibility to complete the SFA for each tax year and return it to HM Revenue & Customs (HMRC), and also to complete a Form 185 for each member. It's also their job to apportion capital gains/losses and income to each member," explains Cox.
Investment club members must disclose all dividend income and capital gains on their tax returns, and will be liable for tax on those profits. But not every member will necessarily own an equal share of the portfolio (recent recruits, for example, may have less), and share proportions may vary over time, so it can be quite complicated for the treasurer to work out.
HMRC provides useful guidance at hmrc.gov.uk. There is also help in the shape of various software packages to track each member's stake. Guy Knight recommends timetotrade.eu, while John Harrington says his club uses the Proshare software and other online resources.
All in all, whether you want to try your hand for the first time or branch out in share investing, investment clubs offer a great opportunity to learn, have fun, make friends – and hopefully – make some money.
Describes the relationship between a client and a stockbroker or independent financial adviser whereby the broker or adviser acts solely on the client’s instructions and doesn’t offer any advice on which shares to invest in or financial products to buy and simply “executes” the wishes of the client, regardless if they are judged to be sound or wrong. Other types of broking service offered are advisory (whereby the client/investor makes the final decisions, but the broker offers advice) and discretionary (whereby the broker manages the portfolio entirely and makes all the decisions on behalf of the client).
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.