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-to-date 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 what 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 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.

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.

Long Clawson Investment Club meets up over a pint

When IFA Martin Walker was invited to join Long Clawson Investment Club shortly after it was started in the Leicestershire village of Long Clawson, he was the only member with a background in finance, among a mixed bunch including farmers, surveyors and recruitment consultants. "They didn't know about investment but they got help and information from The Share Centre," he explains.

Some 10 years later he's chairman, and the average pot per member is around £9,000. Members, of whom there are currently 10, each pay £60 a month. "We encourage new members to invest a bit more in order to catch up with the others," Martin adds.

The portfolio is around 20 to 25 shares, and members each have responsibility for one or two shares. Each month they report back on news and performance (by email if they cannot attend) for their allocated shares, and recommend adding, holding or selling; the club then votes.

"We use stop losses on an individual share basis. But we are generally quite disciplined about selling: the treasurer prepares a monthly report on the portfolio and if some holdings are becoming too large we will sell some to keep things balanced," adds Martin.

How has the club done? Despite members' lack of investment experience, it has roughly kept pace with the FTSE 100 over the long term. But, he says: "Other clubs are far more serious about the investment side than we are. There's a strong social element to our club."