TICN In The Press: June 2nd, 2002

"Club together to buy your shares" by Fiona McGoran
After losing out on Eircom, Irish investors are now joining clubs to seek bargains. By Fiona McGoran

HOW do you choose a stock? Where do you get information on companies and share prices? How much do transactions cost? More and more Irish people are turning to investment clubs to find the answers.

These are groups of friends, relatives or colleagues who join together to dabble in stock markets. In America, where the first club was established in Texas more than a century ago, there are more than 60,000, with at least 1m members. In the republic, there are 180, with 4,000 members.

"There's been a major increase in the popularity of clubs because so many people - more than half a million - bought Eircom shares, and it has heightened their awareness of the stock market," says Owen O'Malley of the Investment Club Network Ireland, a group that offers tuition and support to members. Although most Eircom small investors got their fingers burnt - some of them losing thousands as the stock plummeted - many are back scouting for bargains.

Market-watchers say the popularity of the clubs is no surprise, as high inflation and low returns on savings move people away from deposits and towards share based investments. Some thrill-seekers are also attracted by the risk of putting their money directly into the stock markets instead of into relatively safe unit linked funds.

According to O'Malley, the average return for Irish clubs last year was 20%, with the best running to 120%. Even though the markets have been very volatile over the past two years, 94% of clubs in Ireland have made a profit.

Like ProShare, a British support group sponsored by the London stock exchange and numerous high-profile companies, The Investment Club Network Ireland charges a membership fee and also earns money from running investment seminars. There is no obligation to join the network or any other support organisation, however, so you can set up a club on your own for a minimal amount.

Although the aim is to make money, joining a club is meant to be fun and educational. So how do they work, and how do you set one up?

How investment clubs work Investment clubs generally need between three and 20 members (one of which can be affiliated to a support organisation such as The Investment Club Network). Members pay a joining fee, with each club free to set its own charge, to create an initial investment fund. They then pay a monthly subscription - usually about Euro 65 each - which is pooled to buy a portfolio of stocks. The Irish stock exchange recommends that investment clubs wait until they have at least Euro 1,000 in the kitty each time they want to buy a new stock.

Being in a club has several advantages for newcomers to the stock market. Pooling investments reduces brokerage fees and gives members stakes in a larger portfolio than they could afford by themselves. Investors also get experience of trading on the stock market in the relative safety of a group before going it alone.

Frank Sherlock, who set up Castleknock investment club in Dublin 18 months ago, has enjoyed a 28% return on his investment so far.

"I had been trading through a stockbroking house in Dublin, and I was tired of paying high commissions. I was also aware that the advice I was receiving may not have been unbiased.

"I decided to take matters into my hands and to learn how to study the performance of companies, so I could make my own decisions without having to rely on somebody else."

He went to an Investment Club Network course in online trading, paid about Euro 50 for a ProShare manual and gathered a group of 20 friends and relatives to form the club.

"It's been a great success story. We invest Euro 70 each a month and our portfolio's return has outperformed most pension funds in Ireland over the past 18 months," says Sherlock. "We subscribe to online research companies where we can follow the stock markets' performance."

Diversification is an investment basic, and the group has spread its funds to reduce risk. Sherlock says the group targets companies from all sectors as long as they have been trading for five or more years, have little debt, and market capitalisations of at least Euro 1 billion.

It has found online trading the simplest way to invest its money.

Before you start Before investing in the markets, make sure your personal finances are in order. If you have already set up a pension, bought life and health insurance, put money into a savings scheme and cleared debts, then an investment club may be worth a look.

It's also a good idea to find out more about them first by reading guides such as The Motley Fool: The Fool's Guide to Investment Clubs, by Mark Goodson and David Berger.

If you are sure about going ahead, buy an investment manual to guide your club's members through the pitfalls. The Irish stock exchange's guide provides the basics for Ireland, but a ProShare or Motley Fool guide would give more detail on strategy.

Next, gather a few friends together for a casual meeting to decide how much you want to invest and in what type of company. Give everyone a chance to consider the financial commitment before calling a second meeting.

Some people like risk, others aren't so keen. Clubs can be similarly extreme in their investment strategies but, as their members have to decide together what stocks to buy, many of them steer a middle course.

Whatever strategy a club adopts, it needs to plot its investments carefully and be aware of what is and isn't possible. Once everyone is on board, open a club bank account to receive members' monthly subscriptions. Direct debits are the easiest way to pay them.

Given that large sums of money can be involved, investment clubs need proper structures. It's normal to have a chairman, an honorary secretary and an honorary treasurer, and bigger clubs also delegate tasks such as trading, auditing and researching.

Members must be clear about the role of the club and ownership of shares. Legal, tax and accounting issues are paramount. For legal reasons, most investment clubs are set up as general partnerships. This avoids the expense of forming a limited company and eliminates potential problems of corporation tax.

Members need to agree on a way of registering investments and on how to manage the finances fairly. All participants should agree to a set of rules that will govern the behaviour of all. A club constitution is advisable. The Irish stock exchange's guide includes a sample rulebook.

Beginning to invest After three or four meetings, the club should be properly structured. It can then start researching stockbrokers and their transaction costs. The cheapest option - online trading - is in its infancy in the republic, as the Irish stock exchange only recently became automated.

Davy Direct (www.davydirect.ie) charges 0.75% for trades up to Euro 25,000, with a minimum fee of Euro 25. Goodbody Online (www.goodbody.ie) charges 1.25%, with a minimum fee of Euro 32. Octagon Online (www.octagononline.ie) charges $ 21.28 per trade.

Two popular online trading companies used by investment clubs in Britain to trade in American and British stocks have certain restrictions for Irish clubs.

E*Trade (www.etrade.co.uk) is available only to Irish investors with a British bank account. There is no minimum investment, however. It charges StgPounds 14.95 each for the first 30 trades in a calendar quarter and StgPounds 8.95 each for any subsequent deals.

Charles Schwab (www.schwab-worldwide.com/europe), which was the first online broker, offers a similar service, although its fees rise with the size of the trade.

Fexco (www.fexco.com), an Irish broker that executes deals without advice, charges 1% on euro trades of up to Euro 6,348.69, and 0.35% on the balance of anything over that, with a minimum fee of Euro 25.

Buying help Some investment clubs become affiliates of a support organisation. The Investment Club Network Ireland (www.ticn.com) is part of an international group that teaches you the basics of investing and then offers you help, although it warns clubs not to regard it as a financial adviser.

A drawback is that anybody who joins a club affiliated to the network is obliged to attend a weekend seminar called Making Money Child's Play, the fee for which is Euro 950, or Euro 895 if you book at least 10 days in advance.

Half the fee is due when they join the club, the balance when they go on the course, which has to be within the first six months. The organisation also offers Money Talks evening lectures for Euro 15.

If you feel you need more information before setting up or investing in a club, there are classes and seminars on the financial markets. IFTI (01-6616997) is a conference organiser in Dublin which also offers courses on investing in the stock market.

Beginner's classes give basic information on business and investment concepts and products. Intermediate classes explore investment strategies and the technical and analytical aspects of financial markets.

Many educational organisations offer similar and cheaper, but perhaps less comprehensive, evening courses.

Reading the markets Investment Clubs: How to Start and Run One the Motley Fool Way by Selena Maranjian (Motley Fool).

Investment Clubs: A Team Approach to the Stock Market by Kathryn Shaw (Dearborn).

Understand Investment Clubs in a Day by Neil Poyner and Calum Campbell (Take That).

ProShare Investment Club Manual (ProShare, from www.proshare.org or 00-44-20 7220 1730).

The Investment Club Network Ireland is on 074-80756.

TOP INVESTMENT CLUB TIPS

1 Make sure you that have all your other finances - pension, debts, health insurance, life insurance - in order before investing. Think of it as gambling with money you can afford to lose.

2 Never have the funds in the name of one member. If the person dies, the funds become part of their estate. To protect the rights of all members, the fund should be held in a brokerage or a bank account under the club name.

At least three people should be required to sign for any transaction. A copy of all members' names and contact details should be provided to the bank or broker along with the articles of association of the club.

3 Ensure you are complying with relevant tax laws and have a legal exit mechanism that allows members to leave with their funds.

4 Make sure everyone has a say in how the money is invested and votes for the final decision democratically.

5 Remember that it is very cheap to set up an investment club. The Irish stock exchange publishes Investment Clubs: A Guide to Establishing and Running a Club for Equity Investors in Ireland. The free booklet is available from the stock exchange (01-617 4200) or its website (www.ise.ie). For tax information and options, contact the Revenue Commissioners.

6 Subtract your transaction costs, stamp duty and contributions from your profits in order to determine your real profit. 7 Read as much as you can about the markets and investment strategies. There are many books on how to set up a club, but they may not be specific to Ireland.