Investment clubs have been around for decades and in simple terms are a group of people who pool their money together to invest.

Novice investors or people who find stock markets intimidating might find comfort in investing in a club.

In this guide, we explain how investment clubs work, how to set one up and the risks to bear in mind:

What are investment clubs?

Investment clubs are groups of like-minded people who pool their money to buy and sell shares on the stock market.

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Clubs can be made up of work colleagues, friends or family members. They don’t tend to have more than 100 people but can have as few as 10. There’s no upper age limit for club members – the only stipulation is they must be 18 or over, the legal age to hold shares in the UK.

How do I set up an investment club and how does it work?

If you want to start an investment club, the first thing to do is decide who you want to include and how much and how often you and members want to invest.

You’ll then need to establish a set of rules. Things to consider are: what happens to dividends? Are they paid out or will they be re-invested? What happens if a member wants to leave? What happens if a member dies? What happens if a member simply stops contributing to the club?

Helal Miah, a research analyst at The Share Centre which has approximately 2,000 investment clubs on its books, says: “Team members are responsible for making vital decisions together, such as how much to invest and where, so choosing comrades who will work well together is essential. These people should be familiar and trustworthy.”

When you start your investment club, you’ll need to set out everyone’s role, such as secretary, treasurer and note-taker as it’s important to have an accurate record of meetings.

Once you’ve agreed on the rules, you can then set up an account via a broker or through a platform such as The Share Centre, Selftrade or TD Direct Investing. You’ll be charged a dealing or platform fee for setting up the investment club.

Going down the broker or platform route is a good move because there will be a permanent record of transactions and you may be able to use the broker’s cash account rather than setting up a joint account to house your group’s money.

What are the tax implications of investment clubs?

Even though you’re investing as part of a group, each member will be taxed as an individual. Adrian Lowcock, head of investing at Axa Self Investor, says it is vital to understand the tax situation as clubs can’t run inside an ISA or a Self Invested Personal Pension (SIPP), so all gains or dividends are taxable.

Capital Gains Tax (CGT) is the tax you pay when you sell an asset that has gone up in value. It is paid at a basic or higher rate depending on the rate of income tax you pay. You can currently earn £11,100 of any gains in the current tax year, tax free, but above this it’s 20% for higher rate taxpayers and 10% for basic rate payers.

“The tax situation will vary per member so one may end up paying CGT while others won’t. That’s why it’s important to decide whether money is paid out or re-invested as you could end up in a situation where some may need the dividend income to pay their tax bill,” says Lowcock.

What are the benefits and risks?

Miah says that being in an investment club has a number of benefits but the main two are educational and social.

He says: “It’s hugely beneficial from an educational point of view because each member will bring unique experiences, analysis and perspective to the table. Expertise is not required within an investment club as it is an extracurricular activity and not a job, so members do not have to be share dealing experts. Sharing knowledge is part of the fun, and amalgamating different fortes and experiences can go a long way in educating members about the stockmarket.”

He adds that the social aspects outweigh most of the other benefits as many clubs have a tendency to keep aside part of their investments to fund social events throughout the year such as lunch and theatre trips.

“Being part of an investment club is a unique experience and essentially you will get as much out of it as you put in to it.”

For Lowcock, investment clubs allow members to take investing as seriously as they want or have as much fun with it as they want, but essentially it’s down to how much time and money they invest into it.

By coming together with others and pooling your money, you’re also pooling knowledge and expertise as one person may be better at research while another better at taking minutes.

But there are downsides. The biggest risks are that the investment decisions taken aren’t good so you lose your money or don’t make any money.  However, the club as a whole is accountable, not just the individual who suggested the stock in the first instance.

The portfolio may also not meet your personal objectives – so you may be after an income but the portfolio doesn’t invest in high yielding investments. Or you may find people don’t commit to it at the same level or that there’s a poor record of account keeping.

They can also include a lot of meetings, note-taking and paperwork.

Who are they aimed at?

“There are a couple of audiences who this will suit: early generation of new investors (20+) who don’t have the knowledge, experience or funds to invest individually. Also women. This group has largely not been serviced well by the financial sector or targeted in the same way as men who dominate the sector,” Lowcock says.

He adds that with the rise in technology and with the government stepping back and encouraging us to invest on our own, investment clubs’ popularity could be on the rise. “There are certainly big areas of potential growth and there’s a place for investment clubs in society”.

Is it the same as a Private Investor Club?

While similar in name, an informal investment club is different from a Private Investor Club such as the one run by retirement firm Mattioli Woods. These are mainly aimed at and only available to “high net worth and sophisticated investors” and are designed to complement existing investment strategies.