It is many people's belief that investing in equities is only for those people with lots of money. This misconception can put off a number of would-be investors. However, one genuine reason why many small investors may be put off is the costs involved in dealing.

For an investor wishing to purchase a relatively small shareholding, transaction costs, including stamp duty paid to the Inland Revenue, and possible research costs, can make the process fairly uneconomical.

One answer to this problem is to pool your resources with people in a similar position. Namely, start up an investment club, an activity that has been popular for some time.

This will allow you to achieve an exposure to the market, without excessive risk.

At this point, it is worth noting that if you had invested £100 in 1945, with dividends reinvested, by the end of last year, this would be worth about £78,643, according to Barclays Capital and Datastream.

There are a number of benefits to investing in this way, including lowering the direct risk to you, by pooling your funds together with a number of other investors.

The collective knowledge and ideas of the investment club should also hopefully produce accurate and informed investment decisions, and help spread the overall research and administration workload.

Studies have found that investment decisions based on collective discussions and democratic choices are more likely to see long-term sustainable profits than decisions based solely on an individual's point of view. Investment decisions in the Wise Speke office are often made using the combined knowledge and opinions of the various team members. There is, of course, also the social side of investing in this way, with meetings to discuss strategy and how individual investments have performed.

When setting up an investment club, it is important to begin by setting parameters in which the club is to invest. These include the timeframe for investing, which is normally a minimum of three to five years, and attitude to risk, which includes what type of company you may be willing to invest in, and whether you would be willing to double a holding that has halved in value. Most importantly, however, is how you choose which shares to purchase.

Other areas to consider could be whether you adopt a stop-loss system and what mediums to use when carrying out research. You may wish to limit your investing to the UK, as this simplifies both research and share dealing.

While diversification reduces risk, you may prefer to stick to what you know. If you see yourself as a bit of an expert on fashion or predicting the next must-have technology, use this knowledge by purchasing related stocks. You may find there are several companies whose products or services your club is familiar with.

Research is going to be one of the most important aspects of investing. Look closely at growth opportunities, quality of management and product development.

It will be necessary to open an account with a stockbroker before the club is able to deal, although if the research is going to be undertaken by yourselves, it should be possible to open an account which will not charge an annual fee, with the only costs being standard dealing expenses.

Michael Rankin is an investment manager in the Teesside office of Wise Speke and can be contacted on (01642 608855). Views expressed are the author's own and are not necessarily held throughout the Brewin Dolphin Group. Wise Speke is a division of Brewin Dolphin Securities Ltd, a member of the London Stock Exhange, authorised and regulated by the Financial Services Authority. Prices, values or income may fall against investor's interests. You should therefore be aware that you may get less back than you invested. Investments may not always be suitable for all individuals. If you have any doubts, you should consut a professional advisor.

Published: 02/11/2004