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Peer-to-peer Lending vs Stocks

<article>
<h2>P2P Lending Vs. Stock Market</h2>
<p>In this article, we will discuss P2P lending vs. stocks, which yields higher returns, and which is safest. We will explain everything you need to know about investing in P2P loans and stocks so that you can make the right decision and determine which you&rsquo;d like to invest in to grow or diversify your portfolio.</p>
<p>We&rsquo;ll be covering track records, liquidity, usability, volatility, and much more to break down both asset classes thoroughly.</p>
<h3>Asset Class</h3>
<p>An asset class is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations. Here you can see the main differences between stocks and P2P loans.</p>
<table class="comparison2">
<tbody>
<tr>
<th>Stocks</th>
<th>P2P Loans</th>
</tr>
<tr>
<td>When you invest in stocks, you invest in a company's equity and become a shareholder, also known as equity investing.</td>
<td>When you invest in P2P loans, you invest in claims against borrowers or notes, essentially entering into a loan contract with the borrower, also known as debt-based crowdfunding.</td>
</tr>
</tbody>
</table>
<h3>Peer-to-peer Lending Vs. Stocks - Comparison</h3>
<p>Below you can see a breakdown showing each asset class's main characteristics and their similarities and differences.</p>
<table class="comparison3">
<tbody>
<tr>
<th>Categories</th>
<th>Stocks</th>
<th>P2P Loans</th>
</tr>
<tr>
<td><strong>Returns</strong></td>
<td>10.31%**</td>
<td>11%</td>
</tr>
<tr>
<td><strong>Cash flow</strong></td>
<td>Every three months, none for non-dividend stocks</td>
<td>Monthly, at the end of the loan term for full bullet loans</td>
</tr>
<tr>
<td><strong>Capital requirements</strong></td>
<td>Low</td>
<td>Low</td>
</tr>
<tr>
<td><strong>Know-how</strong></td>
<td>Low - Moderate</td>
<td>Low - Moderate</td>
</tr>
<tr>
<td><strong>Security</strong></td>
<td>None</td>
<td>Dependent on the platform you invest in and ranges from none to buyback, mortgage, or collateral</td>
</tr>
<tr>
<td><strong>Fees</strong></td>
<td>Brokerage fees, expense ratio (ETFs) from 0.05% to 2%</td>
<td>Secondary market fees 0.85% - 2%, withdrawal fees &euro;1 - &euro;2</td>
</tr>
<tr>
<td><strong>Tax treatment</strong></td>
<td>Capital Gains Tax, Dividend tax (you can typically deduct losses from capital investments)</td>
<td>Capital Gain Tax, Income tax (0% - 30%) (you can&rsquo;t deduct losses from p2p in many jurisdictions)</td>
</tr>
<tr>
<td><strong>Liquidity</strong></td>
<td>High</td>
<td>High - Moderate</td>
</tr>
<tr>
<td><strong>Volatility</strong></td>
<td>Moderate-High</td>
<td>Low</td>
</tr>
</tbody>
</table>
<center>
<p><em>** The historical average yearly return of the S&amp;P 500 is 10.314% over the last 50 years</em></p>
<p><mark>Watch our video comparing stocks and P2P Loans. 👇👇👇 </mark></p>
<div class="video"><iframe src="https://www.youtube.com/embed/VrgZlde1MEg" frameborder="0"></iframe></div>
<p class="question">Keen to earn interest with P2P lending?</p>
<button class="redirect external_link_button promo" value="peerberry">Earn Interest on PeerBerry</button>
<div class="question">Learn more in our <a href="https://p2pempire.com/en/review/peerberry">PeerBerry review</a>.</div>
</center>
<h2>Return</h2>
<p>When speaking of return, there are several things you should be aware of, as stocks and P2P loans differ quite a lot here.</p>
<h3>Stocks</h3>
<p>By trading stocks, you only make money through dividends or if the value of a company increases.</p>
<div class="checklist-box">
<ul>
<li>Your return from stocks is not always predictable</li>
<li>When the value of stock plummets, chances are that the price will bounce back at some point</li>
<li>By investing in companies, you own a share of the company</li>
</ul>
</div>
<h3>P2P Loans</h3>
<div class="checklist-box">
<ul>
<li>By investing in loans, you make money from the interest earned from P2P loans</li>
<li>Your return from P2P loans is mostly predictable</li>
<li>By investing in loans, you own claims against the borrower</li>
<li>When a loan defaults, the return is highly dependent on the ability of the lender to recover the debt. The chances of recovering the debt are high if a mortgage or some additional collateral secures the loan. The likelihood of fully recovering an unsecured defaulted loan is low.</li>
</ul>
</div>
<p><mark>Stocks can potentially provide much higher returns, even over 20% whilst P2P loans typically return 11-12% per year, however, the chance of a return is much higher with a P2P loan, and when investing in stocks, although you can make more of a return on investment, there is also a much higher chance of losing all of it.</mark></p>
<h3>Upside vs. Downside Risk</h3>
<p>The upside potential for stocks is naturally much higher than for P2P loans. You can earn more than 100% by investing in particular growth stocks. By participating in P2P lending, you won't be able to make more than 17% per year. <strong>The upside is, therefore, limited.</strong></p>
<p>The <strong>downside risk is 100% for both P2P loans and stocks</strong>. However, the chance that a stock will recover some of the lost value is higher than the potential recovery from a defaulted loan.</p>
<h2>Volatility</h2>
<p>Volatility is the unpredictable change in stock prices and is essential when deciding where to invest your money. Volatility can be affected by many factors, such as economic crises, public relations, political developments, and changes in national economic policy, to name but a few.</p>
<h3>Stocks</h3>
<div class="checklist-box">
<ul>
<li>The volatile stock market increases the chances for higher returns and losses. There is an opportunity to make big wins any time, but also higher losses.</li>
<li>The stock market is more prone to market volatility due to economic news, geopolitical events, and changes in the financial markets.</li>
</ul>
</div>
<h3>P2P Loans</h3>
<div class="checklist-box">
<ul>
<li>P2P lending isn&rsquo;t considered a volatile asset class. The return is determined at the time you invest in one loan and the return on your investment depends on the ability of the borrower to repay the loan as well as the ability of the lending company to collect the debt. The return from P2P loans is much more predictable during normal market conditions.</li>
<li>External factors like regulators or a financial downturn of markets may lead to higher default rates. P2P loans are typically not as heavily impacted by geopolitical events and economic news.</li>
</ul>
</div>
<p><mark>P2P loans are much less volatile than the stock market, mainly because they are less impacted by external factors. We always recommend studying the company, its management, and lending practices before investing.</mark></p>
<h2>Track Record - Regulation &amp; Protection Against Frauds</h2>
<p>You can see here that P2P lending has only emerged recently compared to the stock market, but does that make it less safe? See the protection for both asset classes below.</p>
<h3>Stocks</h3>
<div class="checklist-box">
<ul>
<li>+ 200 years</li>
<li>Companies are regulated by the SEC (Securities and Exchange Commission) and many other agencies. Brokers are regulated by FINRA (financial industry regulatory authority)</li>
</ul>
</div>
<h3>P2P Loans</h3>
<div class="checklist-box">
<ul>
<li>+ 20 years</li>
<li>Regulation happens on the national rather than the global level. For example, in the UK, the P2P lending platforms are regulated by the FCA (Financial Conduct Authority), and in Lithuania, by the Central Bank. Currently, the EU works on a European Crowdfunding Service Provider License distributed by local authorities to platforms that pass the regulatory process.</li>
</ul>
</div>
<p><mark>As you can see, both asset classes have regulations. As the stock market has existed for a long time, the principles are more of one-size-fits-all, reassuring investors. In contrast, P2P lending regulations differ from country to country.</mark></p>
<h2>Time Investment - The Time Is Money</h2>
<p>Before investing, you must do your homework and learn how the asset class you&rsquo;re interested in works. Giving yourself the highest chance of success (and the lowest chance of loss) is essential.</p>
<h3>Stocks</h3>
<p>If you decide to invest in stocks, you shouldn't do it blindly based on vague recommendations.</p>
<h4>Initial Time Investment</h4>
<p>Investors should learn how the stock market works instead of blindly investing their money.</p>
<ul>
<li>ETFs are more suitable for passive investors as you diversify broadly across dozens or hundreds of companies. This option is also the least time-consuming.</li>
<li>Stock picking can be very time-consuming as you need to evaluate whether a company is undervalued or overvalued.</li>
</ul>
<h4>Initial Investment For Trading</h4>
<p>Depending on your investment strategy, you can spend hours analyzing charts and trying to predict where the price is moving toward and when it&rsquo;s the best time to invest.</p>
<p>Often, beginners can become nervous and make emotion-based decisions to liquidate their portfolios when the price drops and as a result, suffer huge losses.</p>
<p><mark>You can trade stocks on any trading platform. You can learn more about a specific European trading app in our <a href="https://p2pempire.com/en/trade-republic-review">Trade Republic review</a>.</mark></p>
<h4>Initial Investment For Monitoring</h4>
<p>Monitoring and adjusting your orders can be very time-consuming, depending on your investment period.</p>
<p>Day Traders or many investors who trade CFDs lose money.</p>
<h3>P2P Loans</h3>
<p>If you are considering investing in P2P loans, you should also do your homework and research the management, terms, and market.</p>
<h4>Initial Time Investment</h4>
<p>Investors should do their due diligence on the platform they plan to sign up for. Researching the management and the performance of the loans will give you a good idea about the practices the platform or lending companies follow. This has a direct influence on your expected returns.</p>
<p>Investors can expect this option to be more time-consuming than investing in an ETF, though less time-consuming than picking stocks yourself.</p>
<h4>Initial Investment For Investing</h4>
<p>You can often automate your investment strategy, meaning that not much time investment is needed here.</p>
<h4>Initial Investment For Monitoring</h4>
<p>You should regularly monitor your portfolio and the platform to spot early signs of poorly performing loans and adjust your strategy.</p>
<p>Investors who don&rsquo;t keep an eye on their investments might lose money.</p>
<p><mark>These options require a time investment, but which option is best for you largely depends on how much time and effort you are willing to invest to achieve the highest return. Some options are more suitable for beginners than others, with less time required and the ability to automate your investment strategy.</mark></p>
<h2>Emotions</h2>
<p>Emotions can be high in these industries, often leading to people making poor decisions with their investments. Here are some feelings that sway investors when investing in either asset class.</p>
<h3>Stocks</h3>
<div class="checklist-box">
<ul>
<li>FOMO (Fear of missing out) - buying high</li>
<li>Panic selling, impulsive trading - selling low</li>
<li>Exciting</li>
</ul>
</div>
<h3>P2P Loans</h3>
<div class="checklist-box">
<ul>
<li>Fear of investing in poor-quality loans or scams</li>
<li>Boring</li>
</ul>
</div>
<p><mark>In both cases, you must let go of the feeling that your money is at your disposal at any time. You should educate yourself about both asset classes, and once you fully understand the risks, you can make more rational decisions when investing in stocks or P2P loans.</mark></p>
<h2>Usability of Investment Platforms</h2>
<p>Let&rsquo;s speak a little about the usability of each platform and how they fare for beginners.</p>
<h3>Stocks</h3>
<p>The complexity of trading platforms depends on your needs. As a beginner, you may wish to start with a trading app like Revolut to gain experience.</p>
<p>Once you&rsquo;ve gained experience, you could move on to an entry-based brokerage company like Degiro, which offers a more beginner-friendly interface compared to brokerage companies like InteractiveBrokers, which target professional traders with more sophisticated tools.</p>
<h3>P2P Loans</h3>
<p>The sign-up process and navigation on most P2P lending platforms are straightforward to use, even for beginners.</p>
<p>Once you&rsquo;ve passed the AML procedures and deposited funds into your account, you can start investing.</p>
<p>This process takes up to two days. On specific platforms, you can start investing on the same day.</p>
<p>Most platforms can be automated and offer the tools to monitor your investments. If you want to learn more about the features of lending platforms, we recommend reading our <a href="https://p2pempire.com/en/review">P2P lending reviews</a>.</p>
<h2>Liquidity</h2>
<p>Liquidity is how quickly you can withdraw your money should you need to. Below is the liquidity for both the stock market and P2P lending.</p>
<h3>Stocks</h3>
<p>The stock market is quite liquid, and you can easily access your cash if you exit your position during market hours.</p>
<h3>P2P Loans</h3>
<p>Liquidity is dependent on the loan type and the features every platform offers. Some platforms offer instant cash-out options, while others offer a secondary market.</p>
<p>An important thing to note is that liquidity is not always guaranteed. If your loans are &ldquo;in recovery&rdquo; you cannot liquidate your portfolio, and your capital may be locked for months or even years before you can access it.</p>
<h2>Diversification Within The Asset</h2>
<p>Diversification is a hot topic within the P2P lending space, but which asset class is better for safely diversifying your portfolio?</p>
<p>Here we look at how the diversification process differs between the stock market and P2P lending.</p>
<h3>Stocks</h3>
<p>With the stock market, you have two options. Either you can invest in mutual funds and ETFs, or in individual stocks and create your own diversification strategy.</p>
<h3>P2P Loans</h3>
<p>The diversification of your P2P portfolio should be approached differently from the stock market.</p>
<p>It is easy to spread your money across loans from lending companies that aren&rsquo;t applying the best lending practices or are operating in countries where the regulatory risk is much higher than the expected return.</p>
<p>Instead of investing all your money into unsecured loans, you should research the lending companies and invest in loans secured by a mortgage.</p>
<p>When choosing your diversification strategy, we recommend downloading the loan book and looking at the defaulted or delayed loans.</p>
<p><mark>Spreading your investments across one lender in just one country, where 80% of the portfolio is delayed, is not a &ldquo;safe&rdquo; strategy. </mark></p>
<p><strong>Diversifying your stock portfolio is much easier than with your P2P portfolio, and especially within the P2P lending space, you should be careful by considering underlying assets, how the loan is secured, the length of the loan term, the recovery rates, and the track record of the company and its finance group. </strong></p>
<h2>Support</h2>
<p>Lastly, we look at support. While we hope you don&rsquo;t need to access support, it&rsquo;s reassuring to know it&rsquo;s there should you need advice or more information regarding an investment.</p>
<h3>Stocks</h3>
<p>You shouldn&rsquo;t expect any support within the stock market. Where there is support, it is limited to the functionality of the brokerage account.</p>
<h3>P2P Loans</h3>
<p>Within P2P lending, there is excellent support on most top-rated platforms. You can often access financial reports and statistics about the borrower, and we encourage you to do so. As a beginner, P2P lending platforms tend to provide more education than brokerage firms.</p>
<h2>P2P Lending Vs. Bonds</h2>
<p>Bonds and P2P loans are attractive options for those looking to invest their money and earn a return, but they differ in several ways.</p>
<p>When you purchase a bond certificate, you become the creditor by providing capital to the business.</p>
<p>This type of bond consists of three components - principal value, repayment term, and interest rate.</p>
<p>By investing in a traditional bond certificate, individuals or entities lend money in exchange for financial returns while contributing to an organization's success. Bonds can be purchased on a stock exchange and typically have longer repayment terms than P2P loans.</p>
<p>On the other hand, P2P lending is a form of financial transaction between investors and a lending company. Investors provide capital to lending companies and, in return, receive interest payments over time. P2P lenders typically have shorter repayment terms than bonds but offer higher yields for investors.</p>
<p>For a company to issue a bond, it must meet strict regulatory guidelines. There are almost no guidelines to list P2P loans in which retail investors can invest.</p>
<p>Generally,<strong> bonds are usually defined as senior debt</strong>, whereas <strong>P2P loans are considered junior unsecured debt</strong>. If a company defaults, bondholders will be paid first before P2P lenders recover their money.</p>
<p>Investing in bonds is, therefore, a safer choice. On the other hand, the minimum investment requirements are higher, and the liquidity is lower than with P2P loans.</p>
<h2>Final Verdict</h2>
<p>So which is better? Both asset classes, P2P loans and stocks have pros and cons, and it comes down to your investment strategy.</p>
<p>In the long term, the stock market outperforms many other investments.</p>
<p>If you want to invest short-term, investing in P2P loans will give you a predictable return, as the volatility of this asset class is much lower than trading stocks.</p>
<p>Since both asset classes don&rsquo;t correlate, it&rsquo;s certainly worth investing in the stock market in the long run and in P2P loans to bring more stability into your portfolio.</p>
<p>A piece of good advice is to treat both asset classes as long-term investments, but keep in mind the liquidity aspect if you need to adjust your investment strategy and the risk caused by the current market environment.</p>
</article>

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