The poor man's investment club
Pooling knowledge and cash can earn you a tidy sum.
Many of us are already successfully invested in the stock market without realising it. After all, that is where most of our pension and assurance monies have been invested and although we rarely hear what is happening to them, most are, hopefully, properly invested and managed for us. We also invest in investment trusts and unit trusts to invest on our behalf.
But it is possible to invest in the stock market direct with very little cost, and also remarkably little capital. I would never suggest that anybody borrows to invest in the stock market. That way can lead to ruin. But through modest investing and careful collection of company information and knowledge, you would be very surprised how large a portfolio can be created.
To invest successfully in the market, there is one key issue that you will require. It is information. I don't mean secrets and inside knowledge, but rather information on industry experience, trading abilities, sector comment, factual history and financial data. Again, somewhat surprisingly, most of this is readily available if you know where to look. Your main difficulty is having the time to collect and collate it all, so that you can decide what to do.
But what about the money? Traditionally, an adviser would say, quite rightly, that to invest in the market, you need to establish a balanced portfolio spread over various sectors and that, to start with, you could need a minimum of, say, pounds 20,000, to buy up to 20 different stocks to give a spread of risk. Each holding ought to be worth at least pounds 750-pounds 1,000 to cover the dealing costs, which will be a minimum of pounds 10 or pounds 12.50 a time.
You can, however, start with as little as pounds 20. But how?
Potential investors could form an investment club based around their friends and colleagues. From such a group, a modest monthly contribution could be paid by standing order into a bank account.
Suppose, therefore, that 15 people got together and paid in pounds 25 per month, then after two months they would have enough for a modest first investment of pounds 750. After 12 months, this would have risen to a surprising pounds 4,500. Every meeting, which could be on a monthly basis thereafter, would then decide what else to invest in and whether to sell the existing holdings.
Within a few months, this group of inexperienced investors would have become investment hobbyists, each keeping their eyes and ears open for new ideas and opportunities. By pooling their experience, knowledge and cash, they could learn about the market, invest directly and even have fun. This latter item is a concept normally frowned on by the industry when talking about money.
Often, club members choose specialist areas to look into themselves, and then bring back the results of their research to the club meetings. Club members who have specialisations often know more about certain sectors and companies than many brokers.
Thus, the two main difficulties of investing in the stock market will have been overcome. By having a group of like-minded individuals to share the responsibility of information-gathering, you can suddenly become one of the best-informed investors in the market. As for the money, by sharing the costs and the risks, the contribution is very modest, arguably cheaper and more fun than investing in unit trusts.
Setting up a club and handling all the paperwork and bureaucracy, used to be extremely tiresome and rather labour-intensive. Some stockbrokers, however, are now taking a more enlightened view on encouraging clubs. Some have even set up special investment club services. For a club to operate efficiently, it is best to keep its share certificates in a nominee account looked after by the broker. This keeps the paperwork to a minimum, and dealing can be carried out straight away, without the need to send in share certificates every time a sale is made.
Normally, the club will have a bank account linked to the broker so that all the funds are kept "in the pot" and under the signatures of at least two of the members.
For more information there is a national association called Proshare Investment Clubs (PIC) which produces an excellent handbook that goes through the process of how to set up a club and what documents are needed. PIC also runs annual awards for the most successful clubs and encourages their development and promotion.
In addition, a useful book on the subject, Investment clubs - the low- risk way to stock market profits (published by Rushmere Wynne), has recently been published and is available from 4/5 Harmill, Grovebury Road, Leighton Buzzard, Beds, LU7 8FF (or credit-card hotline number 01525 850270), price pounds 5. The book is written by Tony Drury who has been involved in clubs for some time and has learnt all his knowledge directly as a private investor.
Investment Clubs certainly aren't made up of millionaires, although I suspect some would certainly benefit from joining one, but in my view it is probable that there are several future millionaires in them already. We can play Monopoly for real, and without going to "Jail". I'll have the Boot if you have the Racing Car. Your throw.
The writer is business planning director at Barclays Stockbrokers.
Proshare Investment Club can be contacted on 0171 600 0084.
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