Investment clubs

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19. The capital account

The capital account is also prepared monthly by the Club treasurer. It shows:

• the number of units each member had at the end of the previous month
• the value of units in the current month
• the number of units bought and sold by each member during the month
• the number of units each member had at the end of the month

The capital account is distributed to all members, so everyone knows what everyone else has bought and sold, and the total number of units they own.

Remember from page 2 that the abiding principle of the capital account is the 'unit valuation system'. Under this system:

• When the club is launched, units are valued at £1, so members get one unit for every £1 they invest.
• The value of units is recalculated every month, to reflect the receipt of dividends and income, and changes in the value of the shares owned by the Club. The treasurer calculates the unit value by taking the assets of the club and dividing them by the number of units already issued.
• Purchases and sales during a month take effect at the valuation at the end of the previous month.

There are a couple of refinements to this system, though, and the first is 'Club brokerage'.

• Many clubs charge a brokerage fee when members buy units. This fee, say 2.5% of the value of the unit then pays for the stockbroker fees incurred when the club purchases equities
• Other clubs charge a brokerage fee only when members withdraw money by selling units

The advantage of charging brokerage on selling only is that it covers the cost of selling shares if the treasurer is forced to do that in order to pay the member making a withdrawal.

If your club charges brokerage on purchases or sales, then there will be two unit values each month - one is the price for buying and the second is the price for selling which is lower than the first price by the amount of the brokerage fee.

The other refinement is the treatment of surplus cash.

• Each month the members will subscribe a fixed amount, say £50. This divided by the sales price of a unit gives the number of units each member buys
• The odd amount left after this is called surplus cash, and the treasurer must keep a note of this and add it to subscriptions the following month

Click here for an example of a capital account.

1. What is an investment club? 2. A simple explanation of how it works 3. Why join an investment club? 4. Deciding on your aims 5. Joining an existing club 6. Preparing to launch a new investment club 7. The draft constitution and rules 8. Drafting the investment strategy 9. Example of an investment strategy 10. Attracting members to your club 11. Preparing for the inaugural meeting 12. The inaugural meeting - appointment of officers 13. The inaugural meeting - key decisions 14. Things to do after the inaugural meeting 15. Starting the processes 16. Running the first meeting 17. Regular meetings - the key to success 18. The cash account 19. The capital account 20. The asset register 21. The annual general meeting 22. Tax 23. Performance measurement 24. Dealing with a member leaving 25. Conclusion

• ProShare Investment Clubs Looseleaf Manual
• The Motley Fool Guide to Investment Clubs
• The Company of Successful Investors