Spare Cash? Shares vs. P2P

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Nick Moules
10th December 2012

If you’re not comfortable with the notion that your money could be lost or the chance that your cash might be worth less than when you started, then you should stick to savings accounts.

However, if you’re the type of person who wants their money to work harder and be worth more, then you should consider shares or the peer-to-peer (P2P) or peer-to-business (P2B) lending markets.

This is a short compare and contrast between the two markets.

Returns

Both markets offer higher returns than savings accounts, but neither are covered by the FSCS – that’s the most important point. However…

The repayment of loans on a monthly basis suits those who want regular payments so they should look at P2P/B. The amount and rate that an individual should lend to a business depends on their own investment risk appetite, but there are guides available, like rebuildingsociety.com’s risk criteria where businesses are graded A+ to C.

Shareholders are entitled to dividends, but there are no guarantees on whether a company will pay dividends or how much that will be. The trick to success in the shares market is of course selling at the right time, invest at a low mark and sell at the top and you’ll make a tidy sum, but if it was that easy…

The risks

The manner of the risk in these investments differs slightly. Shares can go up or down, sometimes dramatically, but in P2P/B you’re relying on the ability of the borrower to repay their loan.

Either way, there’s a chance your investment won’t come off and you could lose everything, but there are ways of minimising your risk, like lending to profitable limited companies with two years of trading (rather than start-ups) and spreading your investments over a number of businesses.

Early access

Selling shares usually comes with dealing charges, so if you sell just after you’ve bought them there’s a chance they won’t have made enough to cover the fees.

In P2B, rebuildingsociety.com operates a secondary market where lenders can sell their microloans to other members. There is a 0.25% charge on the outstanding part of the loan for using the marketplace.

Pensions

Self-invested personal pensions (SIPPs) can be used to invest in peer-to-business BUT NOT peer-to-peer lending, because it is only possible to make loans to third party businesses, not individuals.

SIPPs traditionally offer holders a limited approved shares list from which to select their investments.

Tax

Depending on whether your shares are held in an ISA or SIPP, you may have to pay income tax on any dividends and Capital Gains Tax on any gains.

The interest you receive through P2P/B is treated as investment income, so you have to declare it through a Self-Assessment Tax Return.

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