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Three Recent Financial Innovations That Can Make You Money

28 - 03 - 2016 | Allan Smith | Huffington Post

Peer-to-peer lending is a financial innovation that has witnessed a massive boom since the 2008 financial crisis, when banks started to reduce their lending activities. When that happened, businesses and individuals looking for loans started to reach out directly to investors through online peer-to-peer lending platforms.

From an investor’s point of view, peer-to-peer (P2P) lending is great as it offers uncorrelated high fixed interest returns. The return on P2P lending is generally higher, than for traditional fixed interest securities such as government and corporate bonds, as the risk associated with P2P lending is higher. However, P2P lending comes with the added benefit of diversification, as P2P investments don’t correlate with the performance of stocks and bonds.

The key to making money with P2P investments is to diversify your investments to reduce potential losses from possible borrower defaults. That way you can benefit from high annual fixed income returns, with a reduced risk of making losses.

Binary options are financial derivatives that have previously only been provided by large financial institutions to their clients. Nowadays, however, even small investors and day traders can make money by trading binary options. Using binary options “everyone can trade the world around them in the simplest way possible - up or down - whether they are trading on their country’s currency, their favorite tech firms, or the coffee they drink,” according to Banc de Binary CEO Oren Laurent.

For example, if you believe the price of a U.S. stock index will increase in the next 10 minutes, because positive U.S. economic data was just announced, then you could purchase a binary call option with a 10 minute time horizon. The price of a binary option will always be between 0 and 100 and your brokerage will always show you a two-way price. The two-way price will look something like this: 49/51. The 49 is the bid price, at which you can sell the U.S. stock index and bet on a price decrease. While the 51 is the offer price, at which you can buy the U.S. stock index and bet on a price increase. So, say you place $10 per 1 unit on a price increase at 51, and the price does end up increasing within the next 10 minutes, you will make $490 profit [$10 x (100-51)] on that trade. Adversely, if the price of the U.S. stock index had ended up lower, then you would have lost $510 [$10 x (0-51)].

The key to making money trading binary options is to jump on short-term trends, which you generally find after economic data announcements or major news headlines.

So-called ‘crowd investing’ is a new financial innovation where investors can invest directly in start-ups or small business via online crowd investing platforms in return for an equity stake in the company. This is a great way for small businesses to receive funding. But it is also a great way for you, as an investor, to diversify your portfolio and potentially earn very high returns.

Similarly to P2P lending, investments in small businesses and start-ups are uncorrelated to the performance of stocks and bonds, which make crowd investing a great tool for portfolio diversification. Furthermore, if you manage to choose the right business to invest in you could see your investment increase 10-fold or more, should the company succeed. While there are undoubtedly risks involved in crowd investing, as most start-up companies fail in the long run, crowd investing platforms carefully choose the companies that you can invest in through their platform, which reduces some of that risk already.

The key to making money through crowd investing long-term is to invest small amounts of money into a range of companies. That way, if one of your investments succeeds, the income from that investment will compensate you for the potential loss on others, while earning you a hefty sum on top.

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