Investing in oil doesn’t mean going to the gas pump, filling up a few cans of gas and selling it to your friends or neighbors if the price goes up. Just like stocks and other securities, you can invest in oil through your brokerage account.
However, there are numerous ways to invest in this global product. And depending on your investment goals and risk tolerance, some options may be better than others.
why should you even consider investing in oil?
oil is one of the most important engines of the economy. allows shipping and transportation. it powers factories and, most likely, your car. Oil companies will remain near the top of the list of the world’s most valuable businesses, even as oil prices falter on concerns about the impact of political events or pandemics.
why? because there will almost always be a demand for black gold.
If you want a piece of the profits from the lucrative oil and gas industry, you have several options to put this precious resource in your portfolio.
how to invest in oil
It’s easy to buy shares of an oil or gas company using a brokerage account. Because these and other major oil companies are listed on major stock exchanges, you can buy and sell shares with no transaction fees. to do that, you need an account with one of the popular brokers like ally invest or td ameritrade
This is one of the easiest ways to invest in oil. but there are several other options available to you.
1. invest in energy etfs & mutual funds
exchange-traded funds (ETFs) and mutual funds allow you to purchase a basket of investments in a single purchase. there are many funds to choose from in this field. Some give you exposure to a pool of oil and gas stocks or commodities. but others focus on particular regions or types of oil.
Some of the major energy indices you can trade include:
- s&p 500 energy index (spny)
- vanguard energy index fund (vde)
- fidelity msci energy etf (feny)
- spdr s&p oil & gas equipment and svcs etf (xes)
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Again, pretty much any online broker will let you trade various ETFs without paying commissions. And there are plenty of great brokers for mutual funds as well that have many no-transaction fee (NTF) funds to choose from.
Just keep in mind that while stocks rise and fall with company performance and expected results, commodities are generally considered riskier than stocks. when you read that the price of oil is going up or down, oil commodities are what they are talking about.
2. trade oil futures and options
Savvy and professional investors often look to options and futures as a way to profit from the commodity and other markets. And since crude oil is obviously a massive commodity, you can also invest in oil by trading options and futures.
However, if you don’t know much about options or futures, be sure to sit down and study before diving in. this type of investing is an extremely risky way to invest if you don’t know what you’re doing. . Even if you do, there’s a good chance you’ll lose money trading options and futures, so be fully aware of the risks when entering.
and price drops may occur. take 2020 for example, when the us. uu. oil prices were briefly negative. a lot of investors lost a lot of money in this period, particularly those who trade futures on the losing side.
And just like investing in oil ETFs or mutual funds, it’s very easy to start with options or futures. Most brokerage firms dropped the base fee for options trades in 2019, but you’ll still pay around 50 to 75 cents per contract. Some investment apps like Robinhood offer commission-free options, and Interactive Brokers is also an excellent broker. As for futures contracts, they typically cost around $1 to $2 each.
This can give you direct investment exposure to oil. when prices go up and down, so will your investment. Depending on your brokerage, you may need additional approval to trade options.
again, this is not for people who want to know how to invest in oil with little money. it is best for people who have significant assets. you should only invest what you can afford to lose if things don’t work out as expected.
3. invest in mlps
For those who want to know how to invest in oil wells, this is one of the most direct options. “mlp” is short for master limited partnership. An MLP is a type of business entity that is publicly traded like a stock. but there are some key differences to understand.
mlps gives you the tax benefits of a private company. this means you only pay taxes on distributions. but it can be bought and sold with the liquidity of a public company. investors are considered “partners”, although most investors do not have an active role in the company.
mlps is best for investors looking to get cash flow from their investment. they are not as volatile as commodities in many cases. but they have some unique tax reporting rules and usually don’t appreciate their value as much. this makes them more of a niche investment than regular oil stocks.
4. buy shares in an oil and gas company
If you want to invest in oil with little money, the best place to look is probably your brokerage account. With the new advent of no-fee trading at all the big brokerages, you can buy stocks without worrying that the fees will eat into your investment.
Some brokers allow you to buy fractional shares, meaning you don’t even need the cash to buy a full share. m1 is an excellent broker to start with fractional shares (here is our review).
If you think oil prices are rising, investing in oil and related companies may be a smart move. Some of the major oil companies you can buy shares of include:
- exxon mobile
- royal dutch shell
- total s.a.
Investing directly in oil companies gives you exposure to the energy market without having to buy oil directly.
However, as with all investments, make sure you understand the potential rewards and risks before clicking the “buy” button.
my personal experience with investing in oil
In January 2016, oil and gas prices and stocks seemed to be at a low point. After a quick chat, my wife and I decided now was a good time to buy oil and gas. we decided to do it through a semi-diversified purchase of three shares.
we bought shares of chevron (cvx), conoco phillips (cop) and exxon mobil (xom) and still hold them in our joint portfolio. Since we first invested in these companies, we have received a trickle of cash flow from stock dividends. If you add the performance of the three stocks, we have a small profit in our portfolio.
but in recent years, we have seen massive changes in the price of oil. the coronavirus outbreak halted global air travel and closed businesses. but currently, the war between russia and ukraine has sent oil prices skyrocketing around the world.
If anything, this price volatility highlights the potential risks and rewards of investing in oil. if you do it right, it can be an incredibly lucrative asset. but it is also very important that global events can have a massive and unforeseen impact on prices and your investment.
pros and cons of investing in oil
Investing in oil can be a lucrative opportunity, and you certainly have numerous options to get started. but, as mentioned, be aware that this commodity can see massive price swings depending on geopolitical events and factors beyond the investor’s control.
It’s also worth mentioning that oil doesn’t have to be your only energy investment. clean energy stocks or renewable energy stocks are also an interesting opportunity. and even more niche sectors, like solid-state batteries, can provide big returns.
Ultimately, you need to define your risk tolerance and overall goals before deciding to invest in oil and gas. But there’s no reason why part of your portfolio shouldn’t include this staple, as long as you do your research and understand the risks.