Beginning in the Stock Market

History's lesson is that stocks tend to perform better than most other investments. From 1926 to 1989, common stocks of the Standard & Poor's 500 returned an average 10% a year or 6.7% after adjusting for inflation according to R. Ibbotson and R. Sinquefield's, Stock, Bonds, Bills and Inflation (SBBI), updated in SBBI 1989 Yearbook (Ibbotson Associates, Chicago). In the period from June 1982 to June 1989, these stocks returned an average of 16.6% a year after adjusting for inflation. Some people earn much more than the market averages, particularly if they read widely of economic trends and other developments that affect markets, and if they choose their brokers wisely.

More and more young people are setting aside part of their paychecks to invest in the market. That is partly because they can no longer assume that Social Security and a company pension will ultimately take care of their retirement needs. They also recognize that when you begin investing while young, you can still afford to take some risks in search of great profits. But, regardless of your age, how can you best get started in the stock market?

Your first decision is whether to aim for income (that is, for high dividends) or for growth (that is, for stocks that pay little or no dividends but have good reason to rise in price). Most investment counselors agree that young people should choose a strategy of capital growth.

As a start, you might consider investing in a mutual fund. For $1,000, or sometimes less, you can buy shares in a pool that is invested by the fund's professional managers in a wide range of stocks. That way you get a diversified investment that you probably could not afford on your own. Many funds grow nicely and, on the down side, few conservative funds lose very much.

There are two basic types of funds: load and no load. You buy load funds through brokers or financial planners, and they charge you a sales commission, as much as 81/2%. You buy no load funds by mail or telephone, and you pay no commission for them. Since both kinds of funds perform about the same, it often makes sense to save the commission by buying the no loads. (For more, see "Your Investments/Mutual Funds.")

Another way to begin is to join an investment club. Since members Jointly choose stocks to purchase, a club offers you an opportunity to invest and to get experience in researching the market. Determining when to sell and when to hold onto a stock is another valuable lesson that can be learned in such a club. Most members ultimately gain enough confidence to do their own investing. Studies show that after five years, 85% of members invest independently as well as through the club. (For more, see "Your Investments: Starting an Investment Club.")

Once you strike out on your own, you probably will be able to afford only one or two stocks at first. But ultimately you should aim to own five to 10. That is enough diversity but not too much for you to keep watch over.

Balance is important. As suggested previously, a quarter of your investments might be in very small companies that give you a chance for big gains and, of course, the possibility of big losses. Another quarter could be in the largest, most conservative companies for stable growth. The remaining half might be medium size concerns that are growing faster than the economy. In every case, try to spot companies whose share prices are relatively low compared with their current earnings and future prospects.

Keep your eye on investing's early warning system. The market as a whole usually moves about three to six months ahead of changes in the economy. On average, the market begins to rise about six months before a recession ends. Typically, the climb lasts 21/2 years, followed by about 11/2 years of downturn.

Bear in mind that business conditions affect various stock groups differently. Basic industries such as autos and housing rise and fall along with the economy. So they prosper when an economic recovery begins. But when the recovery is a year or more old, the strongest companies tend to be consumer goods firms such as retailers, clothing makers and home furnishing manufacturers, That is because consumers finally feel secure enough to spend freely.

In picking stocks, you probably can benefit from buying Some sophisticated market information guides. A popular one is Slandard & Poor's Security Owners' Stock Guide, which gives the vital statistic on over 5,300 common and preferred stocks and more than 601 mutual funds; it costs $99 a year. You can get still more in depth information from The Value Line Investment Survey for $495 a year To save money as well as earn it, just remember that these advisory service guides often are available at your public library "your Investments: Choosing Advisory Services.")

When you buy stocks or bonds, you can choose either to hold the certificates yourself or keep them in so called street name. That means they are held by your broker. Which is better for you? There is one clear drawback to holding your stocks in street name. If the brokerage firm runs into severe financial troubles, your holdings could be tied up for months. You will, however, get them back eventually, because they are insured by the Securities Investor Protection Corporation. But keeping your stocks and bonds in street name has many advantages. It is certainly convenient. You do not have to worry about losing your certificates or sending them through the mail. If you want to borrow on margin that is, take out a loan from your broker your securities in street name easily serve as collateral. Brokerage houses also maintain up to date records on the value of your holdings, and will reinvest your dividends automatically in, say, a money market account.