SIC 6799
INVESTORS, NOT ELSEWHERE CLASSIFIED



This classification covers establishments primarily engaged in investing, not elsewhere classified. Businesses covered in this industry include investment clubs, commodity contract pool operators and trading companies, and venture capital companies.

NAICS Code(s)

523910 (Miscellaneous Intermediation)

523920 (Portfolio Management)

523130 (Commodity Contracts Dealing)

523999 (Miscellaneous Financial Investment Activities)

Investment Clubs. An investment club is a group of individuals who meet regularly, usually once or twice a month, and pool their money, time, knowledge, and efforts to discuss and invest in securities. The investment club is a method whereby individuals are able to gain experience and acquire knowledge about stocks, financial statements, and securities markets. It is a proven means of learning and profiting by doing with others what an individual cannot accomplish alone. The primary goals of an investment club are: to educate the individual members; to make a profit on the money invested; and to encourage social harmony among the members for greater productivity. Investment clubs also serve a vital national function in that they create many new investors trained in successful investment techniques, and in so doing, provide a substantial and regular flow of capital for the needs of growing industries.

The purpose of the National Association of Investment Clubs (NAIC)—a division of the National Association of Investors Corporation, a nonprofit organization owned by its membership—is to encourage the creation of investment clubs for the purpose of becoming successful operations. Founded in 1951, the NAIC has grown to a level wherein the total new monthly money invested through NAIC membership investment exceeds $14 million. The total holdings of NAIC members' portfolios exceed $466 million. According to National Association of Investors Corporation statistics, there are nearly 25,400 investment clubs worldwide with an estimated 500,000 members.

An investment club must file tax returns like any other business entity. When the club adopts the partnership format, the individual members pay taxes on dividends and realized capital gains even though the members leave their money in the club for many years. The partnership must also file the partnership information return form, which informs the Internal Revenue Service of the financial distributions made to individual partners. The investment club may request an exemption from filing this form by writing to the U.S. Treasury Department. If an exemption is granted, the partners must still file their share of club income on their personal tax forms. If the club is a corporation, it must pay taxes on its earnings, with no tax liability accruing to the members until a distribution is made. In 2000, investment club members were required to file a Form 1065 (U.S. Partnership Return of Income) and a Schedule K-1 (Partners Share of Income, Credits, and Deductions) on individual tax returns. While the club does not have to pay federal income taxes, it must report to the IRS the portfolio results, including each member's share of the account.

Commodities Markets. While stocks, bonds, and mutual funds are the most common investment vehicles for individual investors, they are by no means the only ones. Two other types of investments, futures and options, have become increasingly popular for the individual investor. In the futures market, investors trade futures contracts, which are agreements for the future delivery of designated quantities of given products for specified prices. Until 1972, this market was linked exclusively with commodities, such as soybeans, cocoa, silver, or pork bellies. Since that time, the fastest growing part of the futures market has been that of futures contracts on financial instruments, such as treasury bonds or stock indexes. While traditional commodities still trade actively, the divergence between the two branches has grown increasingly wide in recent years. In 1999, for instance, there were 390 million contacts traded concerning financial instruments, while there were only 32.7 million grain contracts traded.

In many ways futures trading is simpler than securities trading. For one thing, there are less than 100 actively-traded American commodities, compared with many thousands of different common stocks. Margins, short sales, and tax considerations are far less complicated than in securities trading. Accordingly, a futures trader chooses investment opportunities from a very small sample and trades are affected with generally more simple mechanics than those associated with securities. It is also considerably easier to follow news and market developments that might have an impact upon a given commodity (such as wheat prices) than it is to follow the complex details that surround any individual stock, such as dividends, earnings, the competition, interest rates, the overall market, and other national and international factors.

A futures contract is a standardized, exchange-traded contract calling for the delivery of a specified amount of a specified commodity in a specified month in a specified location. Unlike a securities transaction, no transfer of property is involved unless and until delivery actually occurs. In fact, analysts estimate that fewer than 5 percent of all contracts actually result in a delivery of the actual commodity. Money does not change hands between the buyer and seller of a futures contract, although each is required to post a margin deposit to ensure responsibility for the entire contract in the delivery month. Unlike an options contract, if a futures contract is held through the last trading day in the delivery month, the holder of the contract must accept delivery and the seller must deliver. Also, futures contracts never result in a delivery prior to the appointed month, whereas an option on a security may normally be exercised and delivery demanded at any time from the trade date to the expiration date.

While most futures contracts used to be agricultural in nature, now people trade futures contracts for a variety of items, including interest rates, stock indexes, manufactured and processed products, nonstorable commodities, precious metals, and foreign currency. Proposals for new kinds of contracts are made all the time.

Futures Exchanges. There are nine major future exchanges in the United States. Trading is conducted by open outcry in "pits" or "rings." The former term is commonly used in Chicago, which is by far the world's leading commodities market. While trading futures bear a number of similarities to stock trading, there are notable differences. For example, futures exchanges put a limit on the maximum daily price changes, a practice not undertaken by stock exchanges. Futures trading is regulated by the Commodity Futures Trading Commission (CFTC), an independent federal regulatory commission established by Congress in 1974. The CFTC regulates the industry and the industry's employees. The Commission was set up to prevent abuse, neglect, fraud, and to promote competition.

The CFTC is Based in Washington, D.C. According to its 1999 annual report, it regulates the activities of 45,593 sales people, 9,482 floor brokers, 1,409 floor traders, 1,534 commodity pool operators, 2,806 commodity trading advisors, 211 futures commission merchants, and 1,609 introducing brokers.

There were a total of 614.2 million contracts traded in 1999, down 1.7 percent from 1998's fiscal year volume. The leading American commodity exchanges and their trading volume for 1999 included: the Chicago Board of Trade, which posted 254.5 million contracts; the Chicago Mercantile Exchange, with 200.7 million contracts; the New York Mercantile Exchange, with 109.5 million; the New York Board of Trade, New York Cotton Exchange, New York Futures Exchange, the Coffee, Sugar and Cocoa Exchange, and the Cantor Exchange, 21.2 million; the Kansas City Board of Trade, with 2.5 million contracts; the Minneapolis Grain Exchange, with 1.2 million contracts; and the Mid America Commodity Exchange, with 31,262 contracts.

The Chicago Board of Trade (CBOT) continues to be the world leader, posting more than 200 million contracts in the six consecutive years ending in 1999. The Chicago dominance results not only from its original agricultural preeminence, but also from its innovations in the realm of financial futures. It should be noted that not all commodities contracts succeed, and that once-popular contracts often fall out of favor.

At the dawn of the twenty-first century, technology played a major role in boosting total trading volume as more investors began trading electronically. In January 2000, electronic trading on the Chicago Mercantile Exchange's GLOBEX2 system increased more than 94 percent from the previous year, topping 2 million contracts. Likewise, at the Chicago Board of Trade, customers sent more than 2.1 million electronic orders to brokers in 1999. Of those, more than 660,000 were filled. In that same period, the volume of electronically routed orders rose 300 percent from 1998.

Managed Futures Industry. The traditional way to play the commodities market has been to open an account with a broker and let that person trade your account. Brokers are compensated by trading commissions and have no financial interest in the outcome of your trading transaction. Discount brokers execute your trades at a lower cost than full-service brokers, but don't generally offer trading advice or other services to the individual investor. As a result, a host of advisory services, quotation and data services, and trading systems have emerged to provide the investor with the information and ability to trade commodities.

Trading for your own account is a risky proposition, and a significant proportion of investors and traders lose money trading commodities. Fixed costs are high (quote screens, commissions, office equipment, etc.), and so is the risk. Rather than opening an account with a broker and dabbling in commodities, many individuals are allowing professional managers to trade futures for them. Managed futures offer individuals several choices: individual managed accounts, private futures funds, and public futures funds. Many new programs that were launched throughout the 1990s entice people to trade their own commodities from home. With personal computer owner-ship and usage at an all-time high, it is more conceivable that individuals may begin to become their own brokers.

Hiring an advisor to manage an individual trading account is similar to using a broker, but with one key difference: the commodity trading advisor (CTA) isn't usually compensated on commissions. Rather, advisors most often participate in the profits of the money they manage through management fees and profit incentive fees. Management fees are charged as a percentage of the equity in the account. Profit incentive fees vary per CTA, but are calculated as a percentage of new trading profits. If the advisor does not make money trading the investor's money, then no fees are charged. At beginning of the twenty-first century, there were 2,806 CTAs, according to the CFTC.

CTA's organize client trading in two ways: individual client accounts or a single, pooled account from which all client money is traded. A CTA who does the latter is a Commodity Pool Operator (CPO). From 1980 to 1996, the number of commodity pool operators registered with the Commodity Futures Trading Commission grew from 1,055 to 1,350. By 2000, the CFTC was regulating 1,534 commodity pool operators.

According to International Traders Research Inc., the top-ranked managed futures program fund manager for the 12 months ending in December 1999 was Mangin Capital Management, based in Basking Ridge, New Jersey, with a compounded rate of return of 121.89 percent and $1.4 million in equity.

Venture Capital. Venture capital is a private source of financing for high-risk business endeavors. It is one financing alternative among many sources of capital that are available to growing companies. Venture capital is generally invested in equity ownership of a company or new venture. The investment is usually in the form of stock, or sometimes in the form of convertible debt, which is a loan that becomes a stock holding at some point. Offsetting the high risk the investor takes is the promise of a very high return on investment.

Between 1992 and 1994, 417 venture-backed companies went public. In 1993, venture capital-backed companies raised $4.2 billion, up 19 percent from 1992. The number of venture capital entities, however, has dwindled in recent years. During the third quarter of 1998, for instance, only 19 companies funded principally with venture capital went public, raising $1.13 billion, bringing to 68 the total number of IPOs. Their offering size was $3.38 billion. During the same period in 1997, however, 98 companies raised $3.35 billion. The average offering size, though, increased from $34.2 million in 1997 to $49.7 million in 1998. During this time, the software and services industries had the most number of IPOs. The telephone and data communications industry came in second. The lead underwriter for this time period was Bank Boston.

Further Reading

Brown, Carolyn M. "Your Club in Dollars and Sense: Good Record-Keeping is Vital to a Club's Longevity." Black Enterprise, February 1997, 44.

Chicago Board of Trade. About the Exchange, 2000. Available from http://www.cbot.com/about_exchange/overview.html .

Chicago Board of Trade. An Overview. 1997. Available from http://www.cbot.com .

——. CBOT 1999 Volume at 254,561,215 Contracts. 2000. Available from http://www.cbot.com/points_of_interest/pressbox/pressreleases/p0001041.html .

Commodity Futures Trading Commission. About the CFTC. 2000. Available from http://www.cftc.gov/annualreport99/about99.htm .

——. CFTC at a Glance. 1997. Available from http://www.cftc.gov .

——. Futures and Options. 1999. Available from http://www.cftc.gov/ .

International Traders Research Inc. CTA Rankings Reports. 25 January 2000. Available from http://www.managedfutures.com/12month.html .

Securities Exchange Commission. Average Offer Size Up $15.5 Million from 3rd Quarter '97. 1 October 1998. Available from http://www.secdata.com .



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