If you are new to investing on the JSE and are looking for a good way to get your feet wet or you feel more comfortable learning about investing with others than on your,  you can start a share club where you research companies  and to discuss investment topics.

When Lydia Venter’s mother passed away she realized that she knew very little about investing and had not done enough to secure her own finances. “I realized that if I started to learn to invest and do it myself I would gain knowledge and that would also help my children to learn”.

When a broker tried to sell her father R2500 a month policy at the age of 65, her father worked out that the commission the broker would earn would be R50 000. “He gave me the money instead which he would have paid to the broker and I used that to start investing in shares”.

“I was very nervous at first and I worked closely with Shaun van der Burg at PSG Online. It took me about six months before I felt comfortable to invest on my own,” says Venter. However she nearly tripled the money over the next two years. “I realized that if you put in some time, just 2- 3 hours over the weekend, you can manage your own money”.

Venter wanted to share this knowledge with other people and in 2009 started the LLL Investment Club (abbreviation for Live and Let Live).

The club was set up with 10 equal units and members paid a once off R2500 per unit raising R25 000. The timing of the club was unfortunate as a few months later the market crashed. In their first year the investment fell by 50%, but they did not sell any shares. “We had bought quality shares and they recovered and a year later our investment was up 154%”.

Initially Venter’s plan was to train up the group, teach them about investing and once they had the confidence they could start investing on their own. However the group has been so successful and benefited from working together that they voted to continue to invest via the share club. The members that only started with one unit of R2 500 have bought out other members that were not actively involved. “Attending meetings is a very important condition of the club,” says Venter.

Now all the investors have equal amount of shares and make a monthly contribution as a group. A new share is bought every three months to build up a diverse share portfolio for their retirement.

The benfits of a share club

Sharing information and research

Learning about the stock market was also the driving force behind Pro Share Investment Club. “We started the club because we wanted to get involved in buying shares and to learn more about the stock market,” says Warrick Fulford, one of the club members.  The club meets ten times a year where they discuss share ideas as well as using it as an educational opportunity. Members are given responsibilities to research a topic and then to educate the group on it. Members may go to a seminar on behalf of the group and report back.

Cutting costs

A share club can also help to cut costs as brokerage fees work on a sliding scale and tend to have minimum brokerage fees.

For example if you want to invest R1000 a month as an individual you will pay a minimum brokerage fee of around R100 which is 10% of your investment. If a group of five friends club together you now have R5000 to buy a share and your brokerage fee is only 2.5% of the investment.

Controlling your emotions

By working as a group you are able to control your emotions and implement your investment strategy. As an individual you may get caught up in the hype of the market or you may not have the guts to buy when there is blood on the streets, but as group you are making unemotional decisions.

The LLL Investment club did not panic when the markets crashed in 2009 as they had a strategy and they stuck to it. Fulford says the Pro Share Investment Club had been building up cash over the last few months and they started buying during the last week when the markets fell. “We took a view on the market and went and bought quality shares cheap,” says Fulford.

Setting up your broker account

Sorting out the details

Before opening an account make sure you have the legal documents in place. Pro Share Investment Club formed a partnership with proper legal documentation. The benefit of a partnership rather than forming a company is that everyone is responsible for their own tax.

Although you can open the account in the name of the investment club, you need to select two people who have access to the account and who can execute the trades.

Stock broking accounts cannot pay out to each member of the club so you need a separate bank account in the investment club’s name where deposits can be made. Pro Share Investment Club chose to open a trust account with an attorney, but the banks also offer group accounts.

If members have to pay monthly, they should set up automatic stop orders to pay into the group account each month so you do not have to chase money.

You need to keep track of the value of each person’s contribution. If everyone contributes the same amount of money, it is easy to calculate, however this may get complicated if people leave or join the group. The LLL Investment Club managed this by creating units and members could buy as many units as they wanted.

Selecting an online broker

Shaun van den Berg, Head of Client Education at PSG Online says when starting a share club, spend some time educating yourselves and learning about the market. Select an online broker that can provide you with research and educational sessions. Many online brokers send out daily emails with trading ideas and offer trading tools like trading charts. Some online brokers offer simulated trading that allows you to trade without money until you are more confident in your abilities.

There is absolutely no need to spend thousands of rands on software programmes to learn about the market. Your broker will be able to offer all the same information as part of the monthly fee. Rather use the money to start investing.

Some brokerages like PSG Online focus on investment clubs and hold monthly seminars to discuss shares as well as other types of trading like single stock futures and warrants. Van den Berg says it is important to have access to a computer as not many online brokers offer mobi sites that would be compatible with your cellphone.

Investment strategy

It is important to decide what your investment strategy is going to be. Most clubs focus on building long-term investments so you do not have to buy and sell shares all the time.

Van den Burg says other clubs have separate accounts for their long-term investment portfolio and short-term trading portfolio. It is important from a tax point of view to keep your investment portfolio separate from your trading portfolio. If you sell the shares in less than three years it could be considered part of your income for tax purposes.

You need to decide what type of portfolio you will hold. Do you want a balanced portfolio with shares, listed property and bonds or do you want a higher risk portfolio with small cap shares? What will your stop loss strategy be? Will you invest in derivative products like single stock futures and CFD’s?

All of these issues need to be discussed before you form the club and included in the club’s constitution.

This article first appeared in City Press