8th September 2016
Now that we’ve explored the basic concepts of what peer to peer lending is and what diversification in investment is, we’re going to look how what returns are, and how they work.
When investing, ‘return’ is any profit that you make on an investment – it is any peer change in value i.e. interest or dividends or other types of cash flow which the investor receives from the investment.
James invests £500 with a P2P website for one year
At the end of the year, he receives £535 back
James has earnt 7% interest on his investment
= He has a rate of return of 7%, or a £35 cash return
Your return is the increase in cash flow that you receive at the end of the term of the investment you make.
A return can be measured in making a number of ways – absolute terms (i.e. in the amount of £’s you have made overall) or in percentage terms of the initial investment amount. As this is usually calculated over a year, it can also be known as the annual rate of return.
If you want to compare a number of investments, it is often simpler to calculate their annual rate of return to make the comparison of their performance straight forward. Sometimes, people call this ‘annualisation’. Of course, it is important to remember that not every investment will be profitable. If it is not, it is regarded as having a negative return.
It may seem daunting at first, but it’s crucial to keep track of all your investments even if you are only building a small portfolio to start кодов with. It’s a good idea to use a spreadsheet to monitor how things are progressing – plus, setting up an excel sheet will take away most of the leg work in calculations for you, speeding things up.
If you want to calculate what you have made on your investment simply follow this step by step:
For example, you invest £100 in a P2P site
If you then collect a £5 return on your investment over 1 year you will end up with £105
The change in value is £105 – £100 = £5, so the return is 5 / 100 = 5%
Stay tuned as next we’re going to be exploring the tax implications for P2P investors and looking at the latest rules surrounding taxation on your returns.
At Huddle, we aim to provide unbiased and informative content to educate you on every aspect of the peer to peer lending market so you can stay informed and easily understand how it works.
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