5 golden rules for a successful share club

From a purely financial perspective, I'm not a big fan of investment clubs. When it comes to investment, I'm a bit of a control freak. I like to do my own research, make my own mind up and I don't have to answer to others. I think that most investment clubs find their investment performance is far from ideal, but that's more than compensated by the social pleasure of the group. Which is fine. But here are some of the common problems I think investment clubs face:1) Make decisions individuallyMaking investment decisions is always fraught with emotion and clouded by ignorance. It's never easy. But this is made all the harder when several others have to be consulted. Meetings are only arranged once a month and are subject to absenteeism, while decisions are subject to misconceptions or just plain prejudices. As far as I'm concerned - and, believe me, I've had plenty of experience - investment decisions made by a committee just don't work. I would argue for individual decision making. Let each member pick one share, or be responsible for a part of the club's money. If they get things wrong and run up a loss, then they'll learn a lesson - a far clearer lesson than one lost beneath the blanket of collective responsibility.2) Get up-to-date informationMany investment club members seem to rely on newspapers for their information. The news reported in the daily papers is second-hand and investment clubs should try to acquire original information. It takes little effort to get annual reports, read company websites or monitor daily corporate news. But investment clubs can do more to gain an 'information advantage'. How? Well first of all, they have personal knowledge within the group, based on their own jobs and interests. Second, they should tap their locality. Why not try and identify all quoted companies within a 50km radius and just focus on them?3) Value shares carefullyWhether it's an oil painting, a house or a vintage car, an investment will never be a good one unless it's bought at a good price - whatever the merits of the underlying asset. Every member of an investment club should make some effort to get to grips with simple valuation tools, such as the Dividend Yield, the PE ratio and Net Asset Value. My booklet How to Make Big Money in the Exciting World of Penny Shares explains all this and more.4) Know when to sellThe selling decision is much easier to make if the reason for the purchase has been made clear in the first place. Before any investment is made, a member should explain to the club why his chosen company is going to grow its earnings, or why the valuation of the shares is too low. I suggest that the reasons for each purchase are written down at the time it's made. This will be the basis for holding the shares. And once the original case is no longer plausible, the shares should be sold. Members should not make the mistake of changing their case for holding a share just because circumstances unfold in unexpected ways.5) Know your aimsOne investment club might be uninterested in long-term investment. But for other clubs, some members may regard it as just a bit of fun, while others may see it as an important part of their long-term savings. This can be the cause of much friction, so it's worth establishing the club's ambitions at the start.To take advantage of the research and selection Red Hot Penny Shares is making today, start your 1 month risk free trial now!

The past is not a guide to future performance. Trades in stocks recommended by Red Hot Penny Shares are small company shares. By their nature, such investments can be relatively illiquid and, as a result, hard to trade. This makes such shares more risky than other investments. Please seek independent financial advice if necessary. Profits from share dealing are a form of income and subject to taxation. Levels and bases of, and reliefs from, taxation are subject to change, and depend on individual circumstances.