All over the UK, groups of friends, relatives and colleagues are forming investment clubs. These clubs, which often meet in the nearest pub, are groups of up to 20 people who pool regular savings to invest in the stock market. Members may or may not make a killing on the stock market, but the advantages are clear.
Shares give far higher average returns than most other investments. And there's no doubt they can be fun, as you follow the fortunes of corporate giants and tiddlers alike. But they are also very risky.
Buying part of a collective fund, like a unit trust, is one way of spreading risk. Unfortunately you also miss out on the fun by losing control over which companies to back. Apart from the social rewards of belonging to an investment club, supporters say these groups are the perfect introduction to the stock market.
This is how it works. You get a group of people you know to form a club. After agreeing the rules, you each put in a certain sum - typically pounds 20 or pounds 30 a month. This forms a fund which you invest directly in shares. The club meets once a month to share information on which shares to buy and sell.
"By pooling together everyone's finances, your risk is greatly reduced," says James Hart of Barclays Stockbrokers, which services some 200 investment clubs around the country. "Also it's a learning process. Over a period of time, when knowledge and experience develop, that's when the clubs become successful."
Even if you're a complete novice, you will learn from other club members, and may later go on to hold shares in your own right once you feel you know enough. The investment club idea came from the US. The first club was formed in Texas in 1898 by an unemployed American as a way of building up enough capital to buy a small business. The concept crossed the Atlantic in the late 1950s, and the National Association of Investment Clubs (NAIC) was formed in the UK.
The NAIC was taken over by ProShare in 1993, an independent body which promotes share ownership, and relaunched as ProShare Investment Clubs. But only in the past year has the idea taken off. Before Christmas 1996 there were around 300 clubs. This has now ballooned to around 1,700.
Building society demutualisations are likely to keep the growth in investment clubs going, says Finola Healy, head of communications at ProShare. Handouts of free shares from the societies have created about 17.5 million new share owners in the UK.
"If you've received a windfall and want to continue investing in shares, but don't feel confident enough on your own, then investment clubs are the ideal, low-risk way to do this," says Ms Healy.
Lawyer Mark Goodson started up investment club H&G Investments two years ago. H&G stands for Horse and Groom, the pub in Rochford, Essex, where members hold their monthly meetings.
"I'd been out of work in 1991 and 1992 and had an interest in investing in shares, but hadn't got any money," he says. He read an article on investment clubs in late 1994. "I thought this seemed like a way of finding out how the stock market worked."
He wrote to 15 friends and 12 of them agreed to join the club, which focuses on shares of smaller companies. In the first year, the club managed to break even. In the second, it made a staggering 50 per cent return, by which time its portfolio grew to around pounds 14,500.
The club's meetings are very relaxed. No formal research presentations are given, but some club members are more clued up than others through reading the Investors Chronicle, and the financial pages of newspapers. The accounts are passed around, investment suggestions are made, and votes are taken. Only four members have to be present for a vote to be carried.
Since April, shares of small companies have been out of favour, Mr Goodson says. "There was one meeting at the beginning of July when prices were very low. No one was upset, but it was a bit depressing," he says.
The best way to get involved in an investment club is to start your own, says Ms Healy. Joining an existing club is rare, although occasionally clubs do advertise for members. Club members have to be able to trust each other. "Sometimes they don't like to take in an outsider," she says.
ProShare produces a manual which tells you how to start and run a club. Most investment clubs are affiliated to ProShare. The manual includes tips on writing the club's constitution, choosing a stockbroker and keeping the accounts.
Not all investment clubs survive the early stages. Sometimes people lose interest or they don't get on well enough. To give your club the best chance, make sure members agree in the early stages on club rules, investment policy and the level of regular savings. And whose turn it is to stand the next round.
ProShare's Investment Club Manual costs pounds 15 plus pounds 3 p&p. Phone 0171- 394 5200.Reuse content