There are many ways to get involved in the fossil fuel market by investing in oil. For those who have a sizable amount of capital and are willing to take necessary risks, the right investment can yield a substantial return.
How To Invest In Oil
The oil business is full of opportunities to invest money and make profits. As with any type of investment, each approach will be associated with some level of risk and corresponding reward.
Exchange-Traded Funds (ETFs)
An exchange-traded fund, more commonly referred to as an ETF, is almost exactly what it sounds like: a fund that can be exchanged or traded. ETFs can be thought of as somewhat of a package deal containing multiple assets. The idea is that investors can trade them, through buying and selling, without having to purchase each item.
An ETF starts with a single investor who owns multiple assets and creates a fund to essentially share with others. With the ability to follow the performance of the assets within the fund, investors can put money down to purchase shares of the entire lot. The ETF can then be bought or sold by those investors through an exchange similar to the stock market, even though they do not own any of the physical assets within the fund.
Commodity Based Oil ETFs
Another way to get involved in the oil market is through commodity-based oil ETFs. The term commodity is similar to goods, only a commodity is a raw material, rather than a finished product.
When you invest in a commodity-based ETF in the oil market, the amount of money invested in shares will correspond to actual barrels of oil.
Oil ETFs that are commodity-based are a great investment for those who are looking to gain access to physical products instead of a profile of assets.
Energy Sector ETFs
Energy Sector ETFs are a much broader category than the previously explained investment methods, being that they include not only oil companies but other energy products such as natural gas and alternatives.
A purchase of an ETF in the energy sector would not grant you direct access to commodities or goods but would come with less of a risk factor. This is because energy sector ETFs focus on various types of oil companies through investment in stocks.
Futures and Futures Options
Futures are essentially uniform contracts that are traded on an exchange similar to stocks. When you purchase oil futures, you are agreeing to trade stocks, bonds, ETFs, mutual funds, or commodities on a specified date.
Futures are beneficial to buyers because they can lock in a set price of the securities or commodities that they are trading for a later date. Sellers, on the other hand, can unload their assets at that same price, with a guarantee that the transaction will take place at the specified time.
Futures options are nearly the same, with the only difference being the investor’s choice to trade shares at any time they choose, maintaining a fixed price while the contract is active.
The Risk Of Oil Investments
The first risk associated with an investment in oil has to do with prices. They are known to fluctuate frequently, and can always change unexpectedly. Therefore, those who are looking to put large sums of money behind a certain investment strategy can find their financials tied up if the timing is not correct.
The earth itself is also a big factor in how much money will be returned or lost from an oil investment. Since oil is drilled from underground reservoirs, geology is a very important aspect. When resources are discovered, the potential amount of oil that can be extracted from each site is predicted before the project starts. Unfortunately, these forecasts are not always correct, leaving investors with a shortage of oil after drilling is completed and the money already used.
Also, oil projects can be negatively affected by changes in politics within the areas that drilling takes place. Investors who financially back oil companies that venture into territories with unstable government leaders could be facing a huge risk.
Finally, many disasters can come into play during oil drilling. These projects involve processes that could potentially become dangerous in more ways than one. Accidental fires can be started at drilling sites and become explosive if they are big enough.
Oil spills can also occur on project sites, resulting in a loss of resources, a crash in the market, and a rise of environmental concerns, all of which could impact an investment significantly.
Investing In Oil: Potential Reward
The before-mentioned risks of oil investments are still relevant, although most of them are not as common today as they were several years ago. New technologies have recently been developed within the industry, resulting in higher drilling success rates and a lower level of risk.
The oil market is known for providing large returns to the investors who fund it. Being that there is a massive supply of resources readily available, oil can be considered steady and reliable. When an oil reservoir is discovered, drilling projects can go on for multiple years, offering returns to investors within the first.
Aside from the return itself, oil investors benefit greatly when tax time comes around. A certain percentage of profits that come from an investment in the oil market are tax-free, maximizing the return for those who are patient with their money.
Lastly, an investment in oil is more stable than most of the alternatives. While it is true that events can occur causing worry for market crashes, ownership of oil can still yield a considerable return, even when the economy experiences a dry period.
What Is The Best Way To Invest In Oil?
As you can see, there are numerous ways to get your hands into the oil business through investments. While the potential rewards that come with an oil investment are substantial, there must be a risk associated to get the payout.
There is no specific investment technique that will prove to be successful for everyone. Instead, each investor must find their method to receive the profits they are looking for. Proper research of the market will be required to decide that an oil investment is right for you.
That being said, if you can put money behind your method and exercise patience, you can likely expect the return you are seeking.