How Does an Investment Club Work? By Katherine Cooch Rau

Getting Started
1. The purpose of an investment club is to pool the financial and intellectual resources of a group of people to invest in the stock market and make money. Clubs range from informal clubs with a social aspect to extremely formalized clubs used to raise capital for other ventures. Clubs are started by first determining who to invite to join the club. Ideal candidates have some disposable income, are willing to do research, get along well with others and have similar investment philosophies (from the risk taker to the extremely conservative investor). A good number of people for clubs are 8 to 12, because that size tends to keeps decision-making simple.
First Meeting
2. At the first meeting of an investment club, an operating agreement is created. This should include the name of the group, member names, contribution requirements for each member, how the operating agreement can be amended, how officers will be determined, how to let new members join and how to let old members leave the group and meeting frequency, length and format. Sample operating agreements can be found on the National Association of Investors Corporation (NAIC) website. As part of the first meeting, a club will discuss areas of interest and expertise for each group member. Decisions are made about how to break up and assign research.
Legal Issues
3. Investment clubs usually organize themselves as a partnership and register with their state or county authorities. State securities laws can be checked online. The North American Securities Administrators Association (NASSA) and the NAIC website have information on the legal requirements for each state. Clubs file with the Internal Revenue Service (IRS) for a tax identification number (also called an Employer Identification Number). This can be done online at the IRS website. Either a broker is hired, who will provide a club with advice and make trades, or club members elect to use an online brokerage and do these things themselves. Finally, an investment club needs to open a joint banking account. A bank that has online services provides an easy way to access a club's account information during meetings.
Moving Forward
4. A club operates by using its operating agreement to meet and invest together. Clubs should keep minutes and records and must file annual financial reports with the IRS.
Tips and Warnings
5. Usually, investment clubs will not have to register with the Securities and Exchange Commission (SEC). Exceptions to this rule are if there are passive members of the club, if the club wants to make a public offering of its securities or if the club has more than 100 members.