For many people, choosing the right investment is crucial for ensuring that they meet their investment goals whether they mean to retire early, create a nest egg for when they finally stop working, or simply grow their money so it can take care of them when they are no longer able to take care of themselves. Unfortunately, with so many investment vehicles on the market, it can be difficult to choose the right one. Luckily, there are many tips, such as reviewing investment goals, considering time frames, thinking about the returns, and diversifying that can help investors choose an investment that meets their needs.
Before the advent of the internet, investment was a convoluted process that required investors to browse through quarterly reports or the wall street journal’s pages to view stock prices. In addition, they also had to hire a stockbroker who would charge up to 2.5% of the value of a trade. As a result, there was greater room for error, dishonesty, and loss of money. Fortunately, today’s investors are armed with the tools and information they need to conduct performance benchmarking and ensure that they are making the best choices with regard to how their money is invested.
Among the most popular investment options, today are P2P (Peer-to-Peer lending) and stocks. Again, there can be some confusion over which is the best option. Fortunately, most people choose to diversify their investments and put their money in both P2P and stocks. Below are a few definitions and comparisons to help you differentiate between the two investment options and help you decide what to choose and when.
What is P2P Lending?
P2P refers to a lending system where lenders or investors loan money directly to borrowers without the involvement of a bank or other financial institution. With traditional banking, parties usually deposit money into banks either as savings or to facilitate payments such as salaries, business bills, and others. Banks then lend this money to borrowers with interest. Depending on the type of account they have opened with their bank, depositors will then get a small interest. The main disadvantage of using bank savings as an investment vehicle is that the interest is very low, often ranging between 0.4% – 4% per annum depending on the bank and type of account. In addition, savings will tend to be eaten up by bank charges and inflation.
P2P lending on the other hand is done through an online platform. It involves matching lenders with potential borrowers. Both secured and unsecured loans are available to borrowers in P2P, although most loans are unsecured, and the secured ones are backed by luxury goods.
How P2P lending works
P2P allows investors to lend directly to borrowers through a number of safe lending platforms online. Due to its unique features, it is often viewed as an alternative source of finance for borrowers who are unable to access funding through traditional channels.
Borrowers usually have to fill out a loan application which may include a credit check in order to find out whether they qualify for a loan. Once their loan has been reviewed, they will then indicate whether they are ok with the interest loan before the loan goes into the funding stage. Investors then decide whether they want to fund the loan and if approved, the funds are disbursed to borrowers. After this, the repayment period begins, and these are split between the various investors depending on how much each of them contributed.
For investors, the process involves choosing a P2P platform, reviewing applications to gauge potential risks, approving loans, and keeping track of their earnings on each platform.
Advantages of P2P lending:
P2P lending has several advantages over stocks. These include:
1. Higher interest rates compared to other investments
According to data from bank rates, the rate of return on P2P lending ranges from 5% to 36%, with an average rate of 13.9%, which is higher than most other investment options. Lendermarket and Swaper are two examples of platforms with a really high return.
2. Quick returns
Investors can choose whether they want to lend their money for three, six, or 12 months. This means that they are able to recoup their investment in a shorter time period compared to other investment options such as stocks and bonds.
3. Easy withdrawal
Investors can withdraw funds at any time. Investors can withdraw funds quickly as long as they provide notice of their intention to do so to the lending platform.
P2P investing is a great option for diversifying investments.
Disadvantages of P2P lending:
Some of the disadvantages of choosing P2P lending vs stocks are:
1. High probability of default
P2P lending platforms are usually an alternative source of financing for people who are considered high-risk by traditional lending institutions. The high-interest rates charged on such borrowers are meant to mitigate this risk. However, there is still a possibility that they could default on loans and cause lenders to lose money.
2. Little regulation
Some countries do not offer insurance or government protection to lenders on P2P lending platforms.
What are stocks?
A stock is a unit share of a company that entitles them to a share of the company’s dividends as well as giving them voting right during the AGM.
Stocks are generally bought and traded in the stock market and investors buy and hold them awaiting an increase in value so that they can sell them or qualify for higher dividends.
Advantages of stocks:
Stocks are a popular investment option because they offer the following advantages:
1. Long track record
They consistently outperform other investment options such as bonds, options, annuities, and bank products in the long term. The average return on stocks per year is 10% while the return for options is 5.1% and 5.5% for annuities.
2. Potential for increase in dividends and value of stocks
Investors buy stocks so that they can take advantage of rising values as a result of economic growth. When an economy grows, there is a rise in purchasing power which leads to greater demand for the company’s products. This in turn leads to higher profits for corporations which can translate into higher dividends or a rise in stock values.
3. Ease of purchase
Trading in stocks is easy and can be done in multiple ways including through a stockbroker or via the internet. As long as you perform due diligence, you can easily purchase stocks in your preferred companies from the comfort of your home through an online trade or a phone call to your stockbroker.
4. Inflation protection
Shares consistently perform well over the years and this can help you to protect yourself against inflation by buying and holding until economic conditions improve.
Disadvantages of stocks:
Stocks have the following disadvantages:
1. High risk
Stock value can be affected by both the company’s and the economy’s performance. This means that if the economy is performing poorly, consumer purchasing power will go down, there will be less demand for company products and in turn, the value of stocks will reduce.
2. Low priority
Stockholders are paid after creditors and bondholders in the event that a company goes bankrupt. Further, there is no guarantee that stockholders will get their money back if paying obligations to take up the bulk of a company’s financial resources.
What is the difference between P2P lending and Stocks?
The fundamental difference between P2P lending and stocks is the fact that the former involves lending money to borrowers via an online platform in order to earn interest while the latter lets investors own a share of a company so they can earn dividends or sell when the value of their stocks goes up.
P2P lending vs stocks – which is better?
Investors should consider the following factors when choosing whether to invest in P2P lending or stocks:
- Risk appetite: P2P lending is highly risky due to the fact that it is largely unregulated, and it serves borrowers that financial institutions consider high risk. However, due to these facts, borrowers often have to pay high interest in order to cover lenders in the event that they are unable to service their loans. For this reason, you should choose P2P lending because it offers much higher returns than stocks.
- Safety: The stock market is highly regulated in most EU countries which means that shareholders are protected from fraud, loss, and other risks if they choose to trade there. Investors who prefer safety over risk should therefore choose stocks as this will help them minimize risk and safeguard their investments.
- Quick returns: P2P lending allows investors to lend money for short periods ranging from one to twelve months. This means that they can choose to lend their money for short periods of time in order to mitigate risk and get their returns back as quickly as possible. Stockholders on the other hand, usually have to wait at least a year if they want to earn a good return.
- Opportunity for diversification: Stock portfolios need to be as diverse as possible in order to enable investors to make maximum returns. Investors who are looking to diversify should therefore consider both P2P lending and stocks in order to ensure that they realize the highest returns possible.
P2P lending and buying stocks are two great ways for investors to grow their investments and earn high returns on their investments. However, since they operate differently, investors will need to conduct thorough research and due diligence in order to determine which one is best for their needs. Investors also have the option of investing in both in order to diversify and increase their returns by ensuring that they have covered all their bases.