Invest in oil

Invest in oil

Why choose oil?

Oil, much like many other natural commodities is a resource that is in limited supply. The rapidly increasing demand over recent years is far in excess of the speed at which companies can finde, extract and process the limiteed natural deposits of oil ifound under the earths surface. This limited supply and ever increasing demand has caused the long term price of oil over the last few years to increase.

Oil is volatile

Due to the fact that there is no easy objective way to value oil much of the value of oil in the markets is driven by sentiments, even more so that the equities markets that at least have a vast array or financail data (income statements, cashflows, balance sheets, ratios etc) on which to partly base valuations. As a result oil prices are much more suseptable to market perceptions of political, social and economic events. Combined with the fact that much of the worlds oil deposits and production is based in the politically volatile Middle East, this means that investing in oil is not for the faint hearted. Though large profits are there for the taking, prices can rapidly fall on the back of news of a conflict somewhere in the world, or even a natural disaster that may affect supply.

Buy Oil Stock

A more conventional approach (and more familiar for the equity investor) is to simply buy the stock of oil companies. Such companies can have many varied activities such as oil mining companies and/or oil exploration companies. By investing in these companies you are not only investing in the price of oil but are also exposed to some of the normal fluctuations that any listed company will experiance such as; management culture, operational risks, financing risks, research and development skills etc. Obviously the risks are very different as not all such companies will prosper during times of rising oil prices.

Assuming you are already a stock investor comfortable with stock investing then investing in oil related companies can be a great way to learning to trade commodities and diversify your equity portfolio without moving too far out of your comfort zone.

Invest in Oil ETFs

Oil and oil related Exchange Traded Funds (ETFs) can be thought of as an indirect investment in oil. You are actually buying an investment in a fund which inturn invests in companies in the oil industry. You have no control over what the fund will invest in as all investment decisions will be made by the fund manager. The main advantages to ETFs is that they can be bought and sold very quickly and cheaply just like a regular share or stock. There are now liquid markets for Oil ETFs and it is now possible to buy and sell ETFs through many of the most popular online stock brokerages and view prices that change as regularly as every minute.

Invest in Oil Futures

Futures contracts are a much riskier way to invest in oil and should only really be used by the seasoned investor. In simple terms they are a contract thatt allows you to either buy or sell a set amount oil at a fixed date in the future at a pre-defined price. In other words they allow you to gamble on the future price of oil.

One advantage to the investor of futures is that they allow you to leverage your bet. In order to buy them you have to register with the exchange where the futures are traded and put down a deposit or margin. At the end of each days trading you are required to meet your margin calls (re-adjust your margin) according to your profit or losses for the day. This margin is like an insurance for the exchange incase your positions move wildly against you. As discussed above, because of this leveraged approach, your profits and losses can quickly become very large and as a result oil future contracts should only be traded by the very experianced investor.

Buy Oil

With emerging economies such as India and China booming, many believe that the upward trend of oil prices is set to continue for many years. What is certain is that the future supply of oil is limited as there is only so much of it in the ground. With no end to the volatility in the Middle East in sight and booming ecnomies continuing to grow in Asia ther is no doubt that the world is going to be reliant on oil for the forseeable future. This could make it a great investment opportunity provided you pick the correct approach.

Why oil prices change

To learn more about why oil prices change and what affects what affects the price of oil please follow the above link.