Short-term market fluctuations can be scary. For one thing, you never know for sure how things will play out. But learning how to buy crude oil stock can help guard against these ups and downs and provide you with a robust, long-term ROI potential.
Crude oil is the rudimentary form of petroleum that is extracted from the ground through drilling and fracking. Investments in crude oil may lean toward the exploration and development of new mines, or it can focus on the refinement and sales of retail gasoline to consumers and businesses. Overall, the historical belief is that holding crude oil stock over time will lead to gains because the resource is finite. However, that narrative has changed some over the years.
How to buy crude oil stock for future gains
Peak Oil Theory began in the 1950s and gained traction throughout the early 2000s. The concept behind it was that the global community would experience a peak in oil production, and then the supply of oil would decrease until it ran out completely. The advent of fracking has changed the beliefs on Peak Oil Theory, as fracking makes it possible to extract oil from many new locations. Shale-rock formations, for instance, hold oil that was not possible to extract prior to the introduction of fracking. Even as alternative energy sources gain popularity, fracking will extend the viability of oil as a fuel source.
Even so, investing in crude oil stocks is still a speculative venture with built-in volatility. Conservative investors should stay clear of aggressive oil investments like penny or junior mines, and only allow oil to make up a small portion of a diversified portfolio. The crude oil investments that make the most sense are ones involving well-established mining or refinement companies.
Steer clear of crude oil stocks until you consider these factors
The first step in thinking about how to buy crude oil stock, is to search for companies with a history of successfully operating functional, producing mining businesses. These companies will exist in politically-stable locations, will have experienced management, and the financials will be favorable. Preferably, stick to companies like this that are also using the most up-to-date technology and equipment.
Next, consider the type of investment you want to make. The three main ways of investing in crude oil are through an oil ETF, an oil company stock, or oil futures. Each method has its advantages, just as each has drawbacks.
An oil ETF is a good investment if you’re looking for diversification within the oil industry. ETFs track an index, sector, industry, or region, and some ETFs specifically track the oil industry. Traditional ETFs that practice a passive management style will have fewer fees associated with management expenses or selling. There may be expiration dates or maturities with these investments, so pay close attention. Some short-term investors will invest in oil ETFs for quick in and out trading of this commodity.
Investing in an individual oil stock can be profitable if you select the right stock. If you choose a market leader, you may be able to secure a dividend with this type of investment. However, investing in an individual oil company is not nearly as diversified as an oil ETF. Also, unlike an ETF, the oil stock will not necessarily move in step with the market’s oil price.
Oil futures can be complex investments, so it is best to stay out of them unless you are experienced. These investments are also highly volatile and can lead to significant losses if you get the timing wrong.
If you’re interested in learning how to buy crude oil stock, your best bet is to focus on the method that fits your investing temperament.
Do you invest in oil? If so, how do you do it? If not, why have you decided not to?