NAIC Starting and Running a Profitable Investment Club
When choosing a broker, compatibility is key.
There are several different types of brokers, but finding a broker who knows how investment clubs work is paramount.
A club can get comparisons from several different brokers before making a decision. The amount of the broker’s commissions and the amount of advice they give vary from company to company.
There are two avenues for keeping cost down when buying stock
1. Major full service brokers offer special programs. You mail in your money and your market order, and the order is executed at market opening the day after receipt. The firm’s commission is prorated over the number of shares executed on behalf of the program participants. The cost will vary, since you do not know how many participants there are at any given time. Another drawback is that you are dealing with a clerk, not a broker.
2. NAIC’s Low-Cost Investment Plan. It is a dividend reinvestment program. You send money to the NAIC plan for investment in a particular company (that is a participant). Once your first purchase of a certain stock has been made, you send future investments directly to the corporation’s dividend reinvestment agent. This eliminates the cost of commissions, or trading fees.
No matter what type of broker a club decides to utilize, all members must sign an agreement when an account is opened. The agreement authorizes designated individuals to place buy and sell orders.
FULL-SERVICE BROKERS
The broker must understand your investment philosophy and assist your club in reaching its goals.
The broker should be willing to provide your club with extra services not available to the individual client: custody of securities, dividend collection and forwarding of stockholder notices. Some brokers charge extra for these services. The trade off is that the broker expects several members of the club to open personal accounts with him or her.
Brokers are in the business to make money, so have your requests organized, and have only one representative of the club deal directly with the broker. About 24 hours prior to the meeting have the representative ask the broker for any information on the stocks that the club owns, or are studying for purchase. This information should be considered before any buy or sell decisions are made.
The club representative should place the buy/sell order with the broker as soon as possible after the meeting.
REQUESTING MATERIAL
Full-service brokers can supply stock information such as Value Line and Standard & Poor’s reports.
Don’t make your requests excessive, and don’t ask your broker for prices, since they are listed on the Internet and in the Wall Street Journal.
The club representative should present the broker with one check, having deposited members’ payments in the club’s account. This will make things easier on the broker, who will appreciate not having to deal with several different checks.
It is suggested that the broker be invited to the Annual meeting. The broker can be asked to give suggestions for the club’s study program, and general information, but don’t expect him/her to give specific examples of stocks to purchase.
REGISTRATION OF SECURITIES
The most practical form of registration for stock certificates is known as “street name’. The broker establishes and account in the club’s name and as the club purchases securities, they are registered in the broker’s name or “street” form. As a result, the club does not receive stock certificates. The broker will submit to the club a monthly statement of the club’s account. Dividend payments are sent directly to the broker and are credited to the club’s account. The broker should forward stockholder notices, proxy statements, and company reports, to the club. Annual and quarterly reports can be sent directly if requested from the company’s investor relations department. You can explain that the shares are held in “street name”, and they you will request to be removed from the company’s mailing list when the stocks are sold.
If securities are held in street name, the club can not participate in the dividend reinvestment plan. The securities must be in the club’s own name.
If a club wants to have the physical stock certificate, the securities must be in their name. Most firms charge $15 – 20 to have the physical certificate sent to the client. Most firms, as well as the SEC are moving towards electronic record keeping instead of the old physical certificates.
New registration forms are now awaiting approval from the SEC. They are called IRO (Individual Registration Option) and offers advantages to individuals and corporations. Under IRO, the club’s securities are registered in the club’s name directly with the corporation. Certificates can be obtained at no cost, and the club is eligible for dividend reinvestment plans. The company’s reports are mailed directly to the owner.