Low interest rates have been giving savers a hard time for a while now and this has seen investments such as shares and peer-to-peer lending enjoy a rise in popularity.
But different investments carry different risks as well as presenting their own unique opportunities. To help you decide what may be best for you, we've compared the risks and rewards of investing in the stock market with becoming a peer-to-peer (P2P) lender.
Shares should be seen as a long-term investment. Prices can fluctuate a lot in the short term, so it's important to be able to commit your money for a few years at the very least.
You normally need to be able to commit your money for the term of the loan, which could be for anything between one and five years.
In order to get access to your money you will need to sell your shares. There will be dealing charges for doing this. If you are forced to access your money when the share price is lower than when you bought it, the value of your shares would be less than when you bought them.
This will depend on which peer-to-peer lending website you use. Some will allow you to access your money earlier, but others may not. Make sure you understand the terms of the site you use.
All shares will fluctuate in value; however, there are higher or lower risk shares depending on the size, age, location and industry the firm is in. The common element with all shares is that the share price can be volatile. Neither the share price nor the dividend is guaranteed to provide a certain level of return. However, compared with P2P, there is the potential for higher returns over the long term.
P2P loans are usually fixed, so you would get a fixed rate of return. In contrast to shares, you know exactly what returns you will receive. However, unless you re-invest the interest you receive, you will not benefit from any capital growth. There is also the risk that the borrower defaults on the loan. You will need to understand how your chosen P2P site deals with this situation.
You can invest for income from shares. Some shares pay dividends, although:
P2P can grow your money, but it doesn't have the same potential as shares. You can re-invest interest to grow your money in the same way as compound interest.
The risk with P2P lending is that your borrower can't repay their loan and defaults on it. In this instance you could lose some, or all, of the money lent to the borrower.
No. If you lose money through a bad investment, you are not protected.
Many P2P sites have set up their own ways of protecting their investors, although you must remember that this is not the same as the protection offered by the Financial Services Compensation Scheme.
The first £5,000 of dividend income is tax-free., You have to pay income tax on any dividends you receive above this and the rate you pay depends on your other income. You may also have to pay Capital Gains Tax on any gains you realise. If you hold your shares in an ISA or SIPP, there will be no income or capital gains tax to pay.
The interest you receive is treated as savings income. The first £1,000 of savings income is tax-free (if you pay tax at 20%). Any interest above this must be declared to HMRC.
Yes, up to any relevant ISA and pension limits. Some shares can't be included in an ISA or SIPP. This will be subject to the rules of the ISA or SIPP provider you are investing with.
From 6 April 2016 loans via a P2P site can be invested via a type of ISA called an Innovative Funding ISA and all interest earned is tax-free. You can lend up to £15,240 in the 2016/17 tax year via an ISA.
To minimise the impact of potential losses, you're better off spreading your money over several shares or borrowers. That way you're covered if a particular share plummets or a borrower defaults.
Shares or peer-to-peer? There's no hard and fast answer.
Whether you invest on the stock market, or lend through P2P websites, it all depends on the investment you're most comfortable with.
Shares can be more volatile than peer-to-peer, but can offer better returns. Peer-to-peer can offer a fixed income - certainly better than can be achieved with a savings account - while being less volatile (and less risky) than shares.
Whether you are planning to invest in shares, peer-to-peer lending or another form of investment, you must be comfortable with the possibility of losing your money. If you're not comfortable with that risk, you should keep your money in a savings account instead.
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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.
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