Stock Market And Social Lending Explained

Summary

• How important is the stock market.
• Peer to peer lending explained.
• ROI camparison.

Investing in the stock market is one of the most traditional ways to improve your financial situation.

On the other hand, social lending is still quite new and unknown.

In addition to this, social lending is often confused with crowdfunding.

The importance of investing in the stock market

It is important to understand the role of the stock markets in the functioning of the economy and businesses beyond the benefits that the so-called "stock market" can and does bring to investors.

From the economic point of view, the Stock Exchange fulfills the function of channelling savings towards productive investments.

It is a mechanism for connecting savers and investors on the one hand and agents with projects and financing needs on the other. Both parties benefit. The former will obtain benefits from their savings in the form of profitability and the entrepreneurs the financing they need to execute their projects. The function of the exchange is therefore to form a meeting point that allows the needs of both to be matched, as well as acting as a guarantor between the two.

On the stock market there are two types of markets, the so-called Primary or issuing market and the Secondary or trading market. In the Primary Market we have all those companies that are listed on the stock exchange, that is to say, those companies that by making a public offering of sale make part of their share capital available to new investors. This is the main way in which they are financed: by putting part of their shareholding up for sale.

Amazon, Tesla, Alphabet, are some of the technology companies that have come up for sale in recent years, achieving million-dollar amounts with which to finance their activities in the ensuing years.

Needless to say, there is risk in investing on the stock market.

Social lending explained

Social lending and Crowdfunding are two different financing alternatives. They can work for individuals and for companies.  In both cases, private or professional investors lend money, but it is different the way they do it and how they get the return on investment.

How each model works

In the social lending model, individual investors, professionals or companies lend money directly to another company that wants financing and is looking for an alternative to the bank. The investor is one more creditor for the company.

In crowdfunding, individual, professional or corporate investors buy a stake in a company that issues shares to finance itself through a capital increase. The investor is a new shareholder in the company.

Risk level explained

If we talk about risk, it is clear that Crowdfunding offers a much higher risk than social lending.

In crowdfunding you invest money in a company that can go well or very bad. If it goes well it will be a great deal with very high returns, but if it goes bad you will lose 100% of the amount invested.

In social lending you lend the money to a company in exchange for an interest rate.

The level of risk also depends from the platform we use. One of the largest platforms in the US is LendingClub. The largest peer to peer lending in Europe is Mintos. There are plenty of peer to peer and Mintos reviews online to read before investing to make sure the tool fits our needs.

Return on investment (ROI)

In the social lending model, the investor lends the money to a private borrower or company and gets a very attractive interest rate for the borrowed capital. 

In the crowdfunding model, the investor buys shares in the company and obtains dividends and a return on the shares if it will be sold to a third party.

In both cases the model is regulated. Peer to peer lending offers a slightly lower risk for the investor compared to crowdfunding, but it also depends on many other factors.

In social lending, returns are obtained with deadlines set in the private loan contract between the parties. In crowdfunding there are no deadlines for the return of the investment.

Conclusions

There isn't a better way of investing. The two investments assets can work in synergy and in the long term. In a balanced portfolio the amount of capital dedicated to social lending and crowdfunding should be much smaller compared to the capital invested in the stock market.