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Monday, November 19, 2012

How to make peer-to-peer capital a part of your investment portfolio

The words "peer to peer" have the ability to drive fear into the heart of the most seasoned investor, but in terms of venture capital lending, peer to peer is just another name for "private equity" done on a more middle class level. The only difference is regulations that apply to private equity do not necessarily apply the same way to peer to peer investments.

What this means is that the peer-to-peer investment industry is a much more free way of making money, but it is also much more dangerous for those who do not know what they're doing. There are many advantages to peer-to-peer investing that no other sort of investment class has. Below are some of the ways in which you will know if peer-to-peer lending is right for you. 

One: Study successful peer-to-peer investment campaigns


Once you have studied scucessful peer-to-peer investment campaigns, then you have personal knowledge of campaigns that resemble those successes. With any form of investment, paper trading is definitely a way to figure out the ins and outs of an investment without losing any money. Before you begin investing real money in any peer to peer lending campaigns, follow a few of them and test your instincts on paper first. Once you have success on paper and you have found campaigns that are similar, you will know that you are ready to put real money down on a peer to peer lending campaign. 

Two: Note peer-to-peer campaigns that have been successful in the past


Do not think that just because an investment class is called peer-to-peer that there will be any greater percentage of bad ideas versus good ideas. The only difference between peer-to-peer investing and the venture capital industry is the amount of money that exchanges hands. You want to look for peer-to-peer campaigns that have been successful in the past. Do not waste your time with pie-in-the-sky ideas from would-be business owners that are looking for their "shot." Real business owners know how to make money for their investors, whether they get those monies from peers or venture capitalists. 

Three:  Do not be fooled by an idea alone. 


Take heed of the interest rates and probability structure of peer-to-peer investing campaigns. There have been many studies done on the mathematics of business, and as long as return rates are comparable to the market, you can take them as a very true indicator of the probability of success of a business. This means that if you want to invest in a peer-to-peer investing opportunity that has a high return on investment, you must be prepared to take more risk. This does not mean that the idea is bad; it simply means that you must do more research into the management team and the industry before you invest. 

Four: Take an assessment of your own financial situation


Many financial experts agree that you should not begin investing in peer-to-peer investing campaigns beyond 10% of your expendable income. On top of that, many financial experts agree that you should not invest in anything until your gross income is above $100,000 per year. No matter how good an idea for a business is, there is always the chance of failure. You do not want to put yourself in a precarious financial situation because an investment went downhill.


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