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Total newbie here...

Are there any benefits to setting up an investment group/club between myself and three other friends, as opposed to doing it by myself?

I am only talking small amounts, say $25 per month, just as some play money?
(My initial thinking is that having a larger fund would allow us more freedom to play and invest. I do realize that any returns (if there were any) would be split up four ways..)

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    Oh no, don't even think of mixing money with friendship. If you still want to go ahead be very careful !! – DumbCoder Mar 16 '13 at 17:00
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    Someone's Tax ID has to be provided to the broker as the person/entity in whose name the transactions are being carried out, and that person/entity is then responsible for paying all taxes on any gains in the account unless this person/entity passes on their appropriate share of the gains to the other investors. Think lots of additional paperwork for everyone since not only has the money to be paid out but the payout has to be reported to the tax authorities and everyone has to put another entry onto their tax returns. – Dilip Sarwate Jun 20 '13 at 2:24
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    Dilip your comment would make a good answer, especially since you are the only one who has mentioned the tax reporting complications. – Jeremy Jun 20 '13 at 3:57
  • What's your tax jurisdiction? In the US, investment clubs can file for their own tax id number. taxmap.irs.gov/taxmap/pubs/p550-011.htm Other people mentioned the benefits which answers your questions, but for $25/mo you're probably better off establishing an automatic investment plan into a low cost mutual fund. That's one of the few options that wouldn't eat up a large portion of your capital in fees. Also the hassle of an investment club probably isn't worth it for those amounts. – T. M. Mar 22 at 19:44
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In most markets, there are fixed fees known as commissions. For instance, with a retail broker in the stock market, you can expect every trade to cost you $7.00 as an example, it is $7.00 regardless of if you place a trade for $25 or $25,000. You will see that just opening the trade, with a smaller amount, will eat up all of your profits and a majority of your capital, but if you opened the trade with more capital through the investment group, then the $7.00 commission will be much less of a tax on your trade.

Basically, the only advantage is that the tax of commissions will be less if you have a larger account, if the commission is a fixed dollar value, which is not always true either.

regardless, at $25 per month, not many markets will be accessible. There is also the possible educational aspect of investing with a group of people, or it can simply be clashing ideals.

  • CQM, thank you for your answer. I have also done some reading on Motley Fool, and a few other questions on this site. If I have a question regarding selecting a broker, would it be the best to create another question or submit here? (Namely, it sounds less expensive to go through an electronic broker, like Ameritrade, but would all members of a club have access to make trades or only one? Or would it be simpler to go through a live broker?) – user20179 Mar 17 '13 at 4:29
  • And just to clarify, I'm thinking $25/person/month. – user20179 Mar 17 '13 at 5:00
  • @user20179 it would be best to create another question – CQM Mar 18 '13 at 0:16
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The benefits of pooling your money with others:

  1. Reducing relative transaction costs and broker fees as CQM mentioned.
  2. Pooling knowledge - by combining with others, you have a greater chance of finding better places to put your collective funds.
  3. Access to new markets - many capital markets (places where people pay to use your money) have a minimum requirement for new accounts or investments. Your pool would be able to buy more types of investments than you would alone.
  4. Cheaper diversification of risk - related to 1 and 3, you can better afford diversifying your investments. It's cheaper to reduce the risk of losing your "eggs" when you can afford to buy more baskets to put them in.
  5. Specialization of management functions - you can save time by assigning roles to each of your friends (i.e. one keeps track of the money, one finds where to invest it, and one performs all of the transactions). You would have to do these tasks yourself otherwise.

The drawbacks of pooling your money with others:

  1. Cost of Decision Making - Any decisions relating to the welfare of your money will probably need to be made together with the other members of your fund which will take time. Additionally, you may lose out on short-lived opportunities because of this necessary process.
  2. Lower Liquidity - It may take you longer to convert your position in the fund to cash in your pocket.
  3. Administration Costs - while this may not apply to your case, in larger funds administrative costs can eat into individual profits tremendously. A manager may take a salary plus a percentage of the total funds under her care as pay. This is the downside to specialization of management functions.

Practically Speaking - I say go for it. You stand to gain a lot of knowledge about how money works without having too much on the line. Good luck!

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