Not too long ago, as a small investor, you had the choice between stocks, bonds, mutual funds and gold and silver bullion. However, the investment landscape for private investors has changed greatly in recent years. New financial solutions provided by fintech (financial technology) start-ups have created new ways of how we can invest our money today. In this article, I discuss four of those.
Peer-to-peer lending came into existence after the 2008 financial crisis to provide financing to small and medium-sized business on a peer-to-peer level. Through peer-to-peer lending, start-ups and SMEs can borrow from a large number of private investors via an online crowdfunding platform. Investors, in return, can generate higher yields through peer-to-peer loans than from traditional fixed income investments, such as government and corporate bonds, as peer-to-peer loans tend to be a riskier. Hence, peer-to-peer loan investments are an excellent addition to your overall investment portfolio.
Popular peer-to-peer lending platforms include Lending Club, Prosper and SoFi.
Automated Investing Using A ‘Robo-Advisor’
A very popular new way of investing in the financial markets, especially among millennials, is through so-called ‘robo-advisors’. Robo-advisors are online wealth management companies that offer low-cost automated investing advice without the need of a human financial advisor.
The way robo-advisors work is you sign up to their online platforms, fill out a risk assessment questionnaire, which determines your risk profile, and then their algorithms generate a fully diversified ETF-based investment portfolio in relation to your risk appetite. If you are happy with the composition and risk-return profile of that prescribed portfolio you can deposit funds into your account and the robo-advisor will invest those funds into the agreed portfolio.
Robo-advisors offer a low-cost way to invest in a fully diversified portfolio without over-complicating the process. Hence, they are ideal for novice investors and those who prefer a ‘hands-off approach’ to investing.
The two most established robo-advisors are Betterment and Wealthfront. They were also the first companies to offer this new investment service. However, the robo-advisor market has grown substantially in the last two years and you can now choose from a range of robo-advisors to make investment decisions for you.
D.I.Y. Online Trading
Alternatively to using a wealth management services, you could also take a D.I.Y. approach and invest in the financial markets yourself. If you have a knack for numbers, business and economics, and have an interest in the financial markets, then the D.I.Y. approach might be right for you.
To get started all you need to do is sign up to one of many available online trading platforms. Deposit cash in your online trading account and off you go. It should be noted, however, that when choosing an online trading platform it is important to pick one that charges low fees and offers the asset classes (stocks, bonds, forex, indices, commodities, etc.) that you want to invest in.
When investing yourself it is important to conduct thorough research on the securities you want to trade and it is important to follow a strategy to keep you on course. Decide what annual return you are aiming for, how much risk you are willing to take, what markets you want to trade and what kind of financial products you will be investing in. It is generally best to focus on specific sectors or markets that you know well, or develop a strong knowledge of, if you will be taking an active approach to investing.
Investing In Start-ups
Finally, another way to invest and potentially generate exuberate returns is through equity crowdfunding. Equity crowdfunding allows private individuals to purchase shares in early-stage start-ups and small businesses through online crowdfunding platforms.
The key to successfully invest in start-ups is to diversify your risk and thoroughly analyze the businesses you will invest in. Most start-ups fail, so it is best to put small amounts of money into 5 or 10 different start-ups as opposed to putting all your money into the one you like best. That way if one succeeds you will generate an exceptionally high return on investment, which will more than cover the losses on the ones that failed.