This kind of question’s becoming increasingly common as more and more people consider private investment in the equity markets as a viable option. It’s no wonder that stock market speculating has become more and more popular in recent times. You’ve now got access to more information than ever before which gives you the opportunity to analyse stocks quickly and in great depth as well as enter and exit your investments efficiently. With the pitiful interest rates offered by banks nowadays as well the idea of getting your money working for you is particularly tempting, particularly if you can do it from the comfort of your own home.

So then, can I invest $100 in the stock market?

Will I have a chance of making big profits that way? The truth is, if you think that you can start with $100 and make large profits in a matter of days, weeks or even months then you’re going to be sorely disappointed. After all, if things were that simple wouldn’t everyone be doing it? In order to elaborate on the question further it’s necessary to look at some of the factors involved in investing. One of the fundamental mistakes that people make is they believe long-term profitability in market speculation is primarily a factor of analysis skills. If they go through a bad patch their natural thought is to study more, learn more and analyse deeper until they know enough to predict the markets accurately. The truth is that success on the markets is actually mainly dependant on the psychological approach a person takes. There’s been many an investor with a massive knowledge of fundamentals, an in depth knowledge of technical analysis and access to a large investment fund who has nevertheless ended up broke. The fear that stops you from making a good investment because you’ve suffered a couple of losers in a row, the greed that makes you stake too much on the next one because you’ve won a couple in a row or even the anger that causes you to make investments that you shouldn’t do because you want revenge on the markets, these are the real financial killers and getting them under control is one of the most critical requirements of successful investing. If we accept that psychology is critically important then it stands to reason that money management is a massive part of that in investing. So back to our questions. Can I invest $100 in the stock market? Will I have a chance of making big profits that way? The same principles apply from a technical standpoint whether you’re investing $1 or $1,000,000. The market can only go up, down or sideways and you open and close your investments in the same way. If the differences between the two approaches is purely psychological then it would seem that a good way to learn the psychological discipline required would be to start with a small amount so any mistakes you make do as little damage as possible and become easier to learn from and move on. Unfortunately it’s not quite that simple and there’s certain factors that work against you that will make it extremely difficult to get anywhere with just a $100 investment. Firstly, you need to consider the brokerage commissions you pay for your investments. If you start with such a tiny amount of money then inevitably the fee’s are going to eat into your bottom line more and more. Since investing is basically a numbers game anytime that your edge is eroded away it makes it that little bit harder. The second factor to consider is that you will actually limit the stocks open to you if you’re only investing $100. Lots of the bigger companies in the world are priced at more than $100 a share, sometimes significantly more. In many cases these can be some of the safe and dependable stocks that you might actually consider investing in, particularly if your investment represents a significant amount of your available cash. Even if you do manage to find some cheaper stocks that are worth investing in you’re forcing yourself into essentially putting all of your eggs into one basket. If you start with a slightly larger fund it might seem like you have more at risk initially but the flipside is that you can spread your investment which if done correctly can actually keep your money more secure whilst still giving you the opportunity to invest in some slightly higher risk markets with larger potential upsides. I’ve obviously laid out two sides to the same argument here. Psychologically it’s far easier to start with a small amount because if you jump straight into the market with your life savings then you’re making something that’s already difficult 10 times harder because you know you can’t afford to lose. On the other hand you want to be investing enough so that you can diversify your portfolio properly, can afford to take some risks and can comfortably afford to pay the commissions required to your brokerwithout eating into your bottom line too much. The obvious answer is to take the middle ground and get saving until you can afford to comfortably risk an amount that gives you the best of both words.

Some alternative ideas for those those with a small amount to invest

If you don’t have enough money for a diversified stock portfolio, there is the option to buy into an index ETF or mutual fund. This would give you exposure to a major stock index such as the S&P 500 or the Dow Jones Industrial Average. Generally speaking ETFs have much lower fees than mutual funds and can be purchased just like any regular stock. ETFs don’t usually have minimum account sizes either. Here are some links to popular Index ETFs. SPDR Dow Jones Industrial Average ETF (DIA) SPDR S&P 500 (SPY)

Final words

Either way please just remember that Rome wasn’t built in a day. Successful investing takes time, patience, hard work, discipline and a little heartache along the way. If you’re in it for the long haul then forget about big profits for a second and make sure you’re in a position where you can approach the markets correctly both financially and psychologically.

When it comes to investing, few topics are more confusing to the majority of investors and the general populace than the difference between stocks and bonds. Fortunately, the answer to this question is not as complicated as it might seem.

This article will briefly outline a stock and a bond and then explain the key differences between the two from an investor’s perspective.

What Is a Stock?

A stock, simply put, is a share of a company that:

1. represents partial ownership of the corporation, and
2. can be bought and sold

Technically, stock refers to the equity (the value of ownership interest in a corporation), and pieces of stock are called shares. It is not uncommon, though, for the word ‘stocks’ to be used in exchange for shares.

Stocks are originally issued as a way for a corporation to finance itself by raising money and avoiding taking on debt. This is called equity financing. A corporation could issue stock, for example, to raise money for more employees so that it can expand and generate more revenue.

After they are initially released, stocks are sold on secondary exchanges. The two main secondary exchanges in the U.S. are the New York Stock Exchange and NASDAQ. Corporations do not typically generate income from these transactions, since their shares are resold again and again.

The main reason why investors become involved with stocks these days is to turn a profit by purchasing the stock at a certain price and selling it at another price. This is done because the investor believes the value of a stock will rise because the corporation is profitable (or will be in the future) and has upside growth potential.

An investor can also short-sell a stock by essentially betting that the value of a company will drop in the near future. The difference between the original price and the lower price represents the investor’s profit.

To recap:

• A stock is a piece of a corporation that signifies partial ownership (equity) in the company
• Stocks are issued as a way to finance a company without going into debt
• Stocks are traded on secondary exchanges like NYSE and NASDAQ

What Is a Bond?

A bond is another tradable security that is built on debt instead of equity. A bond:

1. represents an obligation to repay borrowed money, and
2. makes the owner a lender instead of an owner

Bonds are essentially loans. When a corporation or a government entity (like a city) issues a bond, it raises money from investors, who then become lenders. In exchange for giving the corporation money, investors receive a promise that they will receive their initial investment at a certain time in the future, plus any interest that has accumulated on the bond.

For example, let’s say a corporation wants to raise $100,000. It can do this by issuing 10,000 bonds worth $10 each. When an investor buys one of these bonds, he or she will receive $10 when the bond reaches maturity, or, the date at which the bond can be redeemed. If this bond has a maturity of 5 years, the investor will receive $10 five years from now, plus interest accumulated over five years. If the interest rate is 2%, and the interest is compounded (calculated) each year, the owner will receive $11.00 – a return of 10%.

Bonds are a form of debt financing, which raises money for a corporation or public entity by creating liabilities. This is different from equity financing because debt must be repaid. The value of a bond, or its yield, is determined by how likely it is to be repaid and the coupon, which is the interest rate that the bond holder will be paid over the life of the bond.

There are many different types of bonds (i.e. a bond issued by a city is a municipal bond) but all share the same basic characteristics.

To recap:

• A bond is a loan to a corporation or public entity
• Bonds must be repaid by the bond issuer and represent debt
• The value of a bond is basically determined by the interest rate

How Are They Different?

A stock and a bond have several practical differences investors need to know.

Ownership versus Creditorship

The first involves the notion of ownership versus creditorship. When someone buys shares of a stock, he or she is a partial owner of a corporation and may or may not have voting rights. When someone buys a bond, he or she becomes a creditor of the corporation.

Fluctuations in Value

Another crucial difference is how stocks and bonds fluctuate in value. A stock’s value, or stock price, is determined by a mixture of fundamental factors, like earnings per share (revenues divided by the number of outstanding shares) and a valuation multiple, like the price-earnings (P/E) ratio. Supply and demand and other financial/economic factors also play major roles, so assessing stock price doesn’t follow a clear-cut formula.

Bonds, on the other hand, fluctuate in value primarily on the market interest rate, the length of the maturity, the investor’s discount rate (a rate that determines how much a certain amount in the future is worth to you now), and the par value, or face value of the bond. Investors can look to interest rates as a key indicator of how much a bond will be worth in the future.

Risk versus Reward

Stocks and bonds also differ based on risk versus reward.

Generally speaking, stocks carry more risk than bonds. This is because stocks can fluctuate dramatically for a wide variety of reasons, many of which may not be clear at all to the investor.

Bonds, on the other hand, are priced partially based on risk, so an investor can find bonds that suit their tolerance for risk. Buying a bond that has been rated as investment grade means you are more than likely to receive your investment back at maturity, plus interest, unless the corporation or public entity fails. Historically, bond markets are also less volatile than stock markets. Perhaps the “safest” investment in stocks or bonds is found with bonds issued by the U.S. Treasury. These bonds routinely have the lowest risk because the full faith and credit of the United States government is behind them.

Stocks may have greater risk, but they also offer greater rewards. A bond’s return, by comparison, rarely outstrips a stock. A municipal bond, for example, has returned an average of 4.2% since 1925, compared to an average return of 5.3% for Treasury bonds, 5.8% for corporate bonds, and 10.7% for stocks.

Where and How They Are Traded?

Finally, stocks and bonds are traded differently. Stocks are originally issued by corporations in initial public offerings (IPOs) in what are called primary exchanges. They are then sold and re-sold in secondary changes like the ones mentioned above.

Bonds, by contrast, are usually offered at public auctions for government bonds and over-the-counter (OTC) markets that are decentralized for corporate bonds. Investors wishing to buy and sell bonds typically do so through brokers, or those authorized and licensed to trade on an investor’s behalf.

To recap:

• A stock represents ownership; a bond represents creditorship
• Stocks and bonds use different factors to determine their value
• Stocks are inherently riskier, but carry more upside profit potential
• Stocks are bought and sold on stock exchanges; bonds are bought through OTC markets

Stocks and bonds are very different, but both, in the end, are tradable securities that represent the potential to grow your investment over time.