Lending Club stock versus Lending Club notes
How to make your money work for you
There are many ways an individual can invest their money. Lending Club represents an interesting company for investors, because one can invest either on their platform by buying notes, or one can go to the NYSE and buy the company’s stock.
First, a chart. How much money would you have if you invested \$10,000 in Lending Club’s IPO versus \$10,000 in Lending Club notes at the same time?
As of 11/1/16 the portfolio containing Lending Club notes would contain \$11,607 in value, while the Lending Club stock investment would be valued at $2,581. That’s not the end of the story, though, because stock certificates and peer lending notes represent two different ways to invest: debt investment and equity investment. Each type of investment has its own potential benefits and drawbacks, as discussed below.
Lending Club stock: an equity investment
An investor who buys an equity investment owns a piece of a company. Lending Club is one such company that offers shares to the public. Although some companies distribute profit back to equity investors, Lending Club is concentrating on growing revenue. It pays no dividends but instead reinvests any profits back into the company.
Investing in a stock like Lending Club represents a bet on the future – the company will continue to grow and revenue will increase, which someday will result in the company paying out dividends to shareholders. Investing in equities represents the potential for unlimited returns; early investors can become millionaires if the company gets very large and profitable.
While stocks have historically have an average return of 7% after inflation, investing in equities isn’t for the faint of heart. Stock prices are based on market sentiment, which varies greatly from day-to-day and month-to-month. Due to this variability, most financial advisors do not recommend stock picking to their clients. This type of variability is easy to see in Lending Club’s stock, as the stock value has varied up to 40% each month.
Lending Club notes: a debt investment
Investing peer-to-peer lending loans represents an investment based on fixed duration debt. While there limited upside potential to investing in investing in loans on Lending Club, there is significantly less risk since investments are spread across hundreds or thousands of borrowers, rather than a single stock. The underlying asset – debt – can also be safer, because the value of the loan isn’t dependent on market sentiment, but rather broad macroeconomic forces. Lending Club note portfolio values don’t typically vary much from month to month, as seen in the graph above.
However, investing in Lending Club notes exposes an investor to other risks, including liquidity, prepayment, inflation, interest rate, systemic, and regulatory, which may not make this investment suitable for all investors.
Diversified investing helps to minimize risk
As seen in the chart above, Peer Lending is designed to offer easy diversification within the asset class, spreading risk over hundreds or thousands of borrowers. However, investing in a single asset, or even a single asset class, exposes an investor to the risks particular to that individual investment. A carefully constructed investment portfolio will seek to eliminate as much idiosyncratic risk as possible by investing in non-correlated assets.
- Stephen Zentner
- November 3, 2016
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