Sharing the risks... and profits

By Justin Harper for MailOnline
Updated:

 

Share clubs are a fun and sociable way to get a taste of the stock market. More than 12,000 clubs with around 150,000 members regularly pool their resources to trade on the stock market - and the numbers are growing. JUSTIN HARPER explains how they work.

What is a share club?

A SHARE club is a group of people who join forces to invest in the stock market, bringing together their time and money on a regular basis. With the stock market reaching five-year highs recently, many more people are testing their skill at investing.

The majority of share clubs are members of ProShare Investment Clubs, which provides support and research tools for members. ProShare is part of the Institute of Financial Services, which is dedicated to improving financial education and awareness in the UK.

IT'S important to get the right kind of people to join your club, because you will obviously be devoting a fair amount of time, not to mention money, to it.

It helps if everyone has broadly the same investment objectives. There's no point mixing cautious Colins with risky Rachels, as you could be in for a lot of arguments when it comes to picking shares.

The average size of a club is ten to 15 members, but there is one club in the UK with 500 members. Aim for at least three members. Most people join a share club when it is first set up. This makes it easier deciding who owns what. A latecomer may cause problems as to what share of the club's assets they own.

To get things started, members usually pay an initial lump sum - maybe a couple of hundred pounds each - into the kitty so the club can start buying shares straight away. They then pay a regular monthly amount into the club's funds.

Average contributions are £30 a month. A standing order is normally the best way to do this.

Members also need to designate a meeting place, which doesn't have to be the same venue each time. Members could use their homes on a round robin basis or meet at a convenient village hall or local pub.

At this stage it's important you have a sound constitution and set of rules in place. This covers all eventualities, from a member leaving to dividing up profits among members.

ProShare Investment Clubs has a manual explaining how to get a club started and how to run it. The manual also features draft rules and a model constitution.

Your constitution forms the legal basis of the share club - deemed to be a partnership - and is recognised as such by HM Revenue & Customs and City watchdog the Financial Services Authority.

One of the fun parts is coming up with a name. You will need this when you register with a bank or a stockbroker.

Assegai share club

ASSEGAI share club is run on the Zulu Principle. The idea is to find cheap shares of companies in special situations which provide the opportunity to make extraordinary profits.

The principle was coined by legendary fund manager Jim Slater, who looked for small and medium-sized companies with good potential. Chairman Dean Harris is one of seven members of the club, which was set up five years ago with friends and family in the Portsmouth area and is looking for new members.

Assegai currently has five stocks, including Chinese zinc mining firm Griffin Mining and Dana Petroleum, which were bought through Barclays Stockbrokers.

Dean, 46, says: 'It's difficult for a new company to get voted in. Someone puts forward a share idea then we'll all go off and research it then come back and take a vote.

'We have strict criteria and look at a lot of Aim-listed stocks we think have good cash-flow and strong fundamentals for future growth.'

Last year, the club's portfolio was up 47%. This year it's risen by another 29%.

Running the club

SADLY, bureaucracy cannot be avoided altogether. You will need to choose a secretary, a chairman and a treasurer.

The treasurer's role is key, as they must keep up-to-date records of how much money there is to invest, who has paid their contributions and how much your share portfolio is worth.

Everyone will have a role, even if it doesn't come with a title. Members will need to divide themselves up to research companies and sectors. These might include banks, retailers and oil firms. If members work in a particular sector or have an interest there, it will make sense to cover that area.

While companies' reports and accounts can be sent to you easily enough, the internet is also a powerful research tool. The majority of UK companies, large and small, have their own websites with designated investor sections.

Have a rigid system in place for buying shares. Typically, a club will work on a one member, one vote system. Each member can put forward a stock which they have researched and presented to the group. All members then vote on whether to buy shares in it.

Picking your shares

HOPEFULLY, some members of share clubs will have previous experience of buying and selling shares or unit trusts as a private investor.

Invest for the long-term - expect to tie your money up for at least three to five years. Before you start trading in the stock market, make sure you have a large enough fund to buy a decent amount of shares and pay the dealing costs.

Experts suggest you have enough money in your kitty to be able to buy at least five different stocks before you start trading.

Share clubs differ from private investors in that they tend to be more adventurous in decisions. Although there is a good social side to clubs, members also tend to enjoy the educational part - even if that means making mistakes.

If you spread your risks across a selection of companies in different sectors and one does badly, it shouldn't dramatically affect the portfolio.

Barclays Stockbrokers also provide support for share clubs. Their equity strategist, Henk Potts, says: 'Share clubs have an element of fun so you can be a bit more adventurous. In most cases, members have other investments such as unit trusts and tracker funds.'

Barclays Stockbrokers has a list of favoured sectors. These include oil, gas and mining companies, plus the media and banking sectors.

But it is advising investors to steer clear of food producers and tobacco firms. ProShare offers a host of free educational events, competitions for the best clubs and its annual awards.

Its website proshareclubs.co.uk lets you join the National Register of Investment Clubs, which gives you free access to all its products and services and lets you research companies and track your portfolio online. A chatroom also lets you communicate with other clubs.

Trading

ONLINE stockbrokers tend to be the cheapest, with the average trade now costing less than £10.

Share clubs should set up a nominee account in the club's name. The treasurer will normally handle the buying and selling of shares. The Share Centre, Selftrade, Barclays, Etrade and TD Waterhouse are all share club-friendly.

Blue chip stockings

BLUE Chip Stockings is a classic example of how a share club can gain an advantage over fund managers. One member is a mother and spotted the huge popularity in Tommy Tippee cups.

She did some research into the Aim-listed company that owns the brand (Mayborn) and the club bought the shares via online broker Squaregain.

Since then, the stock has become the best performing share in their portfolio, growing by 13%. Blue Chip Stockings chairman Dolores Maisonneuve, 40, says: 'This has been a huge learning curve for us. We didn't have much knowledge of companies and how to analyse them when we first started.

'One company did really badly and we panicked a bit. We have now put in 'stop losses', which set out when we should sell a share if it's doing badly.' The all-female group meets in various coffee shops around Central London and members put in £30 a month.

It is currently looking for new members . Blue Chip Stockings has managed to break even in its first year.

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