Stock Market Investments for Beginners

Through stock market investments, it is possible to amass hundreds of thousands of dollars in wealth over the long term. As a beginning investor, however, choices as to how to put money to work within the stock market can appear overwhelming. To begin, you must first become familiar with basic corporate finance as it relates to stock market valuations. From there, you can best invest money into a mutual fund or dividend reinvestment plan (DRIP) -- to manage risks and invest for growth.

Corporate Finance

Corporations issue both stocks and bonds to secure financing. Bonds are actually loans -- where the corporation makes interest payments on principal from creditors. Alternatively, shares of stock represent ownership stakes within the corporation. In exchange for putting up cash, a shareholder is afforded with voting rights and junior asset claims. Junior asset claims mean that common shareholders are to be paid last from the cash proceeds of any bankruptcy liquidation sale. Further, the corporation pays dividends on common shares at its discretion, but is legally mandated to meet interest obligations on bonds.

Risk Versus Rewards

Because of their junior asset claims, common stock valuations closely track business earnings. Over time, business earnings can trend toward zero or infinity, which makes for volatile stock market performance. Stocks are likely to lose money in recession, when the economy contracts and corporate profits are weak. When the economy recovers, stocks should perform well on the strength of improved business earnings. As a benchmark for U.S. stocks, the S&P 500 has averaged an 11 percent annual return since its 1957 inception. This 11 percent average, however, does include 22 percent losses in 2002 alongside 26 percent gains in 2009. As a beginning investor, you should dollar-cost-average into stocks, instead of attempting to time the market. With dollar-cost-averaging, you will invest a smaller sum of cash every month, instead of putting up one lump sum at a particular point in time.

Mutual Funds

The Securities and Exchange Commission recommends mutual funds for diversification and professional money management. Each mutual fund share represents a smaller claim over a large asset pool that owns dozens of different securities. Your mutual fund cash can be managed either actively or passively. With an active fund, your fund manager will complete research and execute an investment plan with the intent of securing relatively high returns. In a passive fund, the company will simply buy and hold an index, or a preset basket of investments. As a beginning investor, you should consider S&P Index 500 mutual funds -- for diversified exposure to the U.S. stock market.

Direct Investment / Dividend Reinvestment Plans

For individual stock market purchases, direct investment plans cater to smaller, beginning investors. With a direct investment plan, you will buy stock straight from a corporation and bypass expensive brokerage fees and commissions. Direct investment plans are often referred to as dividend reinvestment plans (DRIPs), because your dividends may be automatically directed to purchase additional shares. You can visit a corporation's investor relations department through its official website for DRIP materials. A dividend reinvestment plan is ideal for a beginning investor to stay the course in the market. For example, a sneaker connoisseur may proudly hold onto his Nike DRIP stock for decades.

Stock Market Investments for Beginners: Sources:

SEC: Invest Wisely - Mutual Funds

SEC: Direct Investment Plans - Buying Stock Directly from the Company

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