For the investor who wants to know more about how to invest in oil, here’s some crucial information to help you before you start investing.
In this article:
- An Investment Disclaimer for Dividends, Stocks, and Assets
- Why Should I Invest in Oil?
- How to Invest in Oil: 3 Possible Investment Strategies and Assets
- How to Invest in Oil Stock: Practical Tips
How to Invest in Oil: What an Investor Needs to Know About the Industry
An Investment Disclaimer for Dividends, Stocks, and Assets
Investors looking for possible capital growth or dividend income may want to look at more than just the traditional stocks in the stock market.
- Other sectors, like the hemp industry and cannabis companies, can give you exposure to publicly-traded stocks in a new industry with a growing market.
- Investors with a longer-term horizon prefer to be safer, with less risk and a benchmark to beat inflation. The appetite for tangible assets leads to some investors in putting their investments in precious metals, like silver commodities or assets.
- An investment in the oil sector can provide not just capital growth and investments, but also risk due to legal reforms, growing public concern and other factors.
Regardless of which investment you decide to go with, avoid investing money you can’t afford to lose.
All companies, investment strategies, and information presented here are for informational purposes only. It helps to know about possible opportunities, research on them, and to talk with your financial or retirement adviser for a more personalized discussion.
Why Should I Invest in Oil?
Here are some reasons why some investors get attracted to the oil sector:
- Investment opportunities are limited as oil is a nonrenewable resource. That means the longer the time frame, the more valuable the discovery and operation of an oil well is.
- Oil and gas investments also lead to exposure to the energy sector, another industry with investment opportunities. The energy sector also has its own merits and demerits, and the ties within the oil industry and energy sector can help you diversify your investments.
- Oil companies also produce natural gas, on top of barrels of oil. As oil and natural gas investments go hand in hand, investors basically have a natural hedge, as many homes and businesses use natural gas every day.
- Oil companies own a lot of real estate assets, although the resale value may go down due to drilling.
- Oil companies also need quite a lot of capital to start, as drilling costs and other operational expenses make entry to the industry more difficult. This higher entry hurdle protects current players for better or worse.
- Oil stocks can also provide a portfolio with diversification as well as dividends from blue-chip stocks.
Of course, the stock market has volatility risks, where a stock can see high highs and low lows. It’s better to know your risk profile and trade or invest in oil stocks following your investment plan.
Like any stocks, investing in oil companies can help you retire early or prolong your working years because of bad investments, especially those made out of ignorance. This is why it’s crucial to research and know as much as possible about any possible investment.
How to Invest in Oil: 3 Possible Investment Strategies and Assets
There are three main ways for investors to do oil investing: individual stocks, exchange-traded funds (ETF), and futures contracts.
1. Individual Stocks
Perhaps the most common way on how to invest in oil, individual stocks provide direct investment in the oil sector.
However, the stock market has volatility risks, and volatility can be both a blessing or a curse. This is especially true with the growing environmentally conscious investing public.
Stock investing also has a trading spread, which is the difference between the buy price and sell price. That can make frequent trading a bit more expensive, as the broker has transaction fees.
2. Exchanged-Traded Fund (ETF)
For the investor who prefers a more hands-off approach, an ETF can help. ETFs can provide beginners a taste of how oil investing goes.
ETFs follow specific stocks with minimal fees compared to a mutual fund. An ETF has a theme or investment strategy, like the top five oil companies or 20 oil stocks with a market cap of more than $100 million.
Using ETFs can minimize your losses compared to just investing in a single stock.
3. Futures Contracts
Lastly, the more experienced investor can have futures contracts for oil. Oil futures have quite volatile prices as evidenced by the oil ticker (WTI). Please note WTI is technically the commodity itself, and oil futures bet on whether the prices go up or down.
With futures contracts, you can invest a relatively large amount of oil barrels on margin, basically debt with your trading capital as collateral. If you correctly bet with the market, you gain a lot of cash, but losing can lead not just to losses of capital but even debt to the broker.
Whether energy stocks, gas companies or oil stocks, investors have a lot of the available options to enter the oil industry. Other options include mutual funds, physical oil, and even owning oil stations.
How to Invest in Oil Stock: Practical Tips
Like investing in the stock market, investments in oil stocks may have general and specific guidelines. Again, these guidelines should go with your investment philosophy.
- If your retirement is near and your risk profile is cautious investments over volatile instruments, then investing in startup oil companies may not be good.
- For those who are younger with a longer horizon, deeper pockets, and an aggressive risk profile, the riskier oil futures, and aggressive oil companies may prove optimal investments.
General Tip 1: Optimize Your Investment
Do you want to know how to invest in oil optimally?
Use your IRA for tax advantages.
You can choose to have a self-directed IRA, where you:
- Have lower admin costs
- Can enjoy the flexibility of making investment decisions. Most managed IRAs need to go through a manager or managers, which can limit and lengthen the investment process
- Have less paperwork to clog your mail. However, you may have to do all of the reporting as well, so make sure you know the basics.
General Tip 2: List down and Understand Your Options
You can go with the simplest — ETFs, the most complex — the Oil Futures, or the middle ground, which are oil stocks.
- ETFs are like fruit baskets with different varieties in one theme. In an Oil ETF, an investor can get fewer fees with minimal transactions for a sector they want to invest, like energy, petroleum, and oil.
- With oil futures, an investor bets on whether the stock price goes up or down using debt. This can lead to massive profits or humungous losses.
- Stocks give you ownership of a company, which is the preferred method for most investors.
Specific Tip for Investing in the Oil Industry: Look at Barrel of Oil Production
Barrel of Oil production, whether daily or monthly, can show:
- How good the technology of an oil company is
- The efficiency of business operations
- Confidence in the market
Of course, oil and petroleum reserves can also mean overproduction.
What an investor can do is to take a look at the average production and reserves of a company and compare them to the industry. A good average would be three oil stocks with similar market capitalization.
The oil industry literally fuels economies now, and finite resources may push prices higher until the public can find an alternative. I hope this guide has helped you learn more about how to invest in oil and decide whether or not it’s the right investment to help you grow your retirement savings.
Do you have any questions on how to invest in oil or other industries? Share your thoughts in the comments section below.
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