They don’t call it ‘black gold’ for nothing.
Oil is one of the world’s most valued commodities, used to light and heat our homes, fuel our cars and power our businesses, as well as in the manufacture of many goods.
But it’s a finite resource, which means as it becomes scarcer, so too will it become more valuable. And, for that reason, oil has always been seen as a great investment opportunity.
Here are some ways how you can buy a stake in this valuable commodity…
1. Buy Stocks and Shares in Oil Companies
Perhaps the most straightforward way to invest in oil is to buy shares in the companies that source, extract, process and distribute oil and its by-products.
The most well-known of these include BP, Royal Dutch Shell, Chevron, Total and ExxonMobil. This is a relatively easy exercise, whether dealing through an online trading platform or a broker.
One of the benefits of owning shares in big companies such as these is that they can offer good returns in the form of regular dividends.
2. Invest in Oil through a Fund
The next logical way to invest in oil is through a fund.
Due to the number of oil companies in the markets, most general funds will have some level of exposure to oil stocks. The Invesco Perpetual High Income Fund, for instance, is a very popular fund with 5% of its portfolio invested in BP.
There are also funds that solely target the oil sector whether exploration firms, processing companies, or service providers. However, these can be much more risky as your investment isn’t diversified.
3. Buy Oil Futures
Buying futures is another option.
Essentially, this is a contract to buy or sell a quantity of oil at a certain price at a specific time in the future.
However, inexperienced investors should be aware that trading futures is a complex and risky process.
Due to a number of factors, such as the cost of transporting or storing oil, it’s possible to lose money even if the price rises.
4. Investing ETFs/ETCs
Exchange Traded Funds (ETFs) and Exchange Traded Commodities (ETCs) are similar to shares, in that they reflect the performance of an index or market, but these types of deals aren’t subject to stamp duty charges, so they’re a cost-efficient way to invest in oil.
An example would be ETFS Crude Oil, which tracks the price of crude, but, there are many more complex options available, depending on how adventurous you feel and level of risk.
5. Trade on Oil Commodity Prices Using CFDs
Contracts For Difference, or CFDs, are an alternative to investing directly in commodities such as oil. Indeed, these can be more cost-effective, as transaction costs are less.
CFDs will also ideal for investing in short term positions, allowing traders to invest in an amount of oil that costs many times more than their available capital.
With margin requirements around 5%, this can mean much higher returns. However, it also means that your losses can exceed your capital.
Investing in oil is a complicated business, as the price can be influenced by so many factors, such as the economic climate, political unrest, global conflict and local tax law, as well as the cost of storage and transportation.
It can be a profitable business, but amateur investors should definitely start by looking at the less risky options when starting out.Last updated: December 1st, 2017