Oil

How To Invest In Oil: Directly & Indirectly | Seeking Alpha

How to buy stock in crude oil

Video How to buy stock in crude oil
Stock market concept with oil rig in the gulf
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Basics of Oil & Oil Investing

Also known as crude oil or petroleum, petroleum is a fossil fuel formed from the remains of animals and plants that lived millions of years ago. the yellowish-black liquid is drawn from deposits below the earth’s surface. Oil is used as a feedstock that is refined into other products, such as gasoline, heating oil, and asphalt.

Because oil is a commodity, meaning it is a base product or raw material used to make other products, it has value as an asset. Like many other commodities, such as gold or various agricultural products, oil can be traded as an investment derivative.

Oil’s abundance, proven usefulness and global popularity are among the reasons some investors believe the commodity will be a valuable asset for the foreseeable future. these are some of the qualities that attract investors and traders to the commodity.

You can invest in oil by gaining direct or indirect exposure to the commodity. Investors can gain exposure to oil directly through oil futures, oil options, or commodity-based exchange-traded funds (OTC:ETFs). To invest in oil indirectly, investors can buy energy sector ETFs, energy sector mutual funds, or shares of individual oil companies.

Important: When investing in oil, investors rarely take ownership of the commodity itself. This differs from stock investing, where the shares represent ownership of the issuing company. for this reason, the process of investing in oil is often referred to as “gaining exposure” to oil.

direct exposure to oil

Investors can gain direct exposure to oil through the purchase of futures or options contracts or through the purchase of commodity-based mutual funds or ETFs. Futures and options can be complex and involve a high degree of risk, while ETFs and mutual funds are relatively simple and moderately risky.

  • Oil Futures: requires a buyer to buy an investment security, or sell an investment security, on a specified expiration date, unless the position is closed before the expiration date. expiration. when it comes to oil futures, investors rarely intend to take ownership of the asset.
  • Oil Options: Provides the buying investor with the right to buy buy) or sell (put option). option) the underlying asset, in this case, oil.
  • commodity funds: allows an investor to purchase shares of an ETF or mutual fund that tracks performance, less rates, from an underlying commodity index, such as a crude oil index.
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The type of investors who typically invest directly in oil are those who are willing to take on the additional risk associated with futures, options and speculation. oil and other commodities can also be used for diversification and hedging strategies.

Tip: Futures and options have a subtle difference. futures contracts represent an obligation to buy or sell a security, while options contracts represent the right to buy or sell a security.

invest in oil indirectly

Indirect oil investments will not directly track the price of oil as a commodity, but will instead invest in stocks that may be affected by oil prices. To gain indirect exposure to oil, investors can:

  • buy shares of an oil mutual fund or ETF that invests in stocks of companies in the oil industry. examples include oil and exploration funds and energy sector funds.
  • Buy shares in individual oil companies. There are three types of oil companies: upstream companies, which drill for oil; midstream companies, which operate pipelines to transport crude oil; and downstream companies that refine and sell the final products.

The type of investors who prefer indirect exposure to oil tend to be those who do not want the added risk of direct exposure to oil as a commodity. For example, an energy sector mutual fund or ETF is a way to gain broad exposure to oil and energy stocks with less sensitivity to oil price fluctuations than direct oil investments.

pros and cons of investing in oil

advantages

  • Return Potential: While the price of oil and the share value of oil-related investments can have periods of significant volatility, there are potential opportunities for investors to earn higher than market returns. .
  • diversification: Exposure to investment types with a return that is not highly correlated with other investments can help diversify a portfolio. Investing in oil stocks or the energy sector can provide returns that differ from other sectors.
  • Inflation Hedging: As commodity prices, including oil, can rise along with the prices of goods and services in an economy, oil can be used as a hedge against inflation.
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cons

  • Numerous Risks: Investing in oil carries additional risk, such as world events, oil price wars, government regulation, technological changes (such as towards electric vehicles), cyclicality and conditions economic. , many of which can cause sudden and dramatic fluctuations in oil prices.
  • Volatility: Mutual funds or ETFs that track the price of a single asset or sector tend to be more volatile than broadly diversified. money. buying oil futures or options can create even more volatility and risk.

oil investment research

To research oil investments, investors can use a number of research tools, including stock research websites, investment research software, and reading commodity news. Investors can also investigate various sector funds that invest in commodities and the energy sector.

Tip: Investors looking for indirect exposure to oil investments can use the popular stock rating filter and quantitative alpha model. the energy sector screen allows investors to choose among the top energy sector stocks with the most favorable ratings. Companies in the energy sector may include those involved in the production and sale of energy, including oil, natural gas, electric power, and renewable energy.

end result

Investors can gain exposure to oil directly, through the purchase of oil futures or options, or indirectly through the purchase of oil stocks or shares of mutual funds or ETFs that invest in oil stocks or the sector broader energy. But investing in oil carries additional risks that investors should be aware of before buying.

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