Both peer to peer and stock market investing are popular ways to grow your wealth.
But what are the key differences? Is one better than the other? When should you invest in each one? The good news is that it isn’t an either/or debate: most people invest in both and that usually is the strategy with the best outcome.
Nevertheless, it’s good to know the key differences and how they compare against each other.
P2P lending and stock market investing
The stock market is a tried and tested way to grow your wealth and has been one of the most popular investing methods for over 100 years. Having said that, many people don’t have the required knowledge to start investing in the stock market, or simply cannot handle the volatility or unpredictability.
P2P investing has only been around since the 2008 financial crisis, but it’s an investment that does offer higher and more stable returns over time.
Here are a few ways to compare P2P lending and the stock market:
The return you get on the stock market largely depends on what you invest in, how long you invest for and the strategy you follow when investing. You could be:
- An individual stock picker: if you pick your own stocks, you’ll know your return on investment.
- Someone who invests through professionally managed funds: if you outsource to a fund manager, they will likely send you regular updates with your overall portfolio return.
- A passive investor through index funds/ETFs: if you use a low-cost index fund, historical data suggests a return of around 8% if you invest for more than 20 years.
With P2P investing, your return is often clearly displayed on the front page of the P2P platform website.
At Swaper, we offer an expected return of 14% and 16% with a bonus.
With P2P investing, there is less ambiguity and more predictable yearly returns.
If you want the highest predictable return possible in a short amount of time, P2P investing might be the better alternative.
The stock market is more liquid than the P2P market: with the stock market, you’re able to sell your investments and receive the funds in a few days. If you are receiving dividends, you’ll get your dividends every quarter unless you reinvest them.
This is different from P2P investing, where liquidity varies widely from platform to platform. At Swaper, we only invest in short-term consumer loans. That means you should get your cash at the end of a 30-day period, which you can choose to reinvest or keep in your account.
You can also choose to liquidate by selling on the secondary market. However, there is also the risk that a borrower doesn’t pay back on time. In this case, we offer buyback compensation; which is automatically applied after the loan has been overdue for 30 days.
For this reason, P2P investing is not as liquid as stock market investing.
If you want to liquidate your investments quickly, the stock market may be a better option than P2P investing.
3. Safety and Risk
The stock market has been around for centuries and has a proven and historical record. Although it is volatile in the short term, it is more predictable in the long run. If you are investing in the long term and your portfolio includes low-cost and diversified investments, then the stock market is not considered incredibly risky.
If you are a day trader and like stock picking, the stock market is a lot riskier and you can lose a lot of money if you’re inexperienced.
P2P investing has only been around for a bit more than a decade, which means it has a much shorter track record. It’s an investment that is not risk-free as there is always the possibility that borrowers default on their payments and take longer to pay you back. At Swaper, we are able to reduce the risk by offering buyback compensation.
It’s hard to say which investment method is riskier than the other; it largely depends on the P2P platform you use and how you choose to invest in the stock market.
Most people agree that if you are investing in the short term and have a small amount of capital, P2P investing is safer and less risky. If you are investing large amounts of money for more than 20 years, the stock market might be a safer option.
4. Investment knowledge
Before the internet and index funds, investors either had to learn the ins and outs of the stock market themselves or give their money to professionals.
Because of their experience, they often charge a hefty fee (even though they rarely beat the stock market in the long term), so many people are shifting towards DIY stock picking or passive index funds. When you first get started with the stock market, you will need to research brokerages, pick the best funds to invest in and learn about capital gains tax.
With P2P investing, the knowledge barrier to entry is a lot lower. That’s because the P2P platform does the work of finding the loans, managing the investors and providing a working platform.
P2P platforms like Swaper are very intuitive and easy to work with; signing up is straightforward, quick and easy, which makes it perfect for beginners. As a P2P investor, you may want to research P2P platforms and learn about tax management, but it won’t be as intensive as learning about the stock market.
If you are a beginner investor or are not interested in learning about the stock market, P2P investing is a great way to invest your funds.
When to invest in each one?
Both stock market investing and P2P investing are good methods of diversifying your portfolio, and choosing the correct one depends on your individual circumstances as well as your own objectives and needs.
We believe that both investment types are an essential part of an investors portfolio: stocks give you the high returns during a bull market and offer the most tax breaks, while P2P investing helps reduce overall volatility and makes your portfolio more predictable.
One could argue that stock market investing is best for long-term goals such as retirement or a house, while P2P investing is great if you have a small amount of capital and are investing short-term.
We hope this article has given you a better idea of how each investment method compares with each other.
The truth is that these two investments are complementary, and this is not exactly an “either/or” scenario.
Curious as to whether P2P investing is for you?
We’ve made it incredibly easy at Swaper, simply: