If you’re interested in trading in financial markets, you’ve probably heard of commodities or raw materials. These are assets that, similar to stocks or currencies, are traded in markets to gain short-, medium, or long-term profits.
One of the most traded commodities is oil. The price of oil is determined by global supply and demand, and it is constantly exchanged on the stock market among numerous investors.
However, investing in gas and oil is not the same as investing in stocks, for example. When investing in oil, investors rarely own the actual commodity. This differs from stock investment, where 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.
The steps you take to gain exposure to oil will depend on whether you are willing to assume the risk of direct exposure to oil as a commodity.
Perhaps all of this sounds a bit confusing, and that’s understandable, but it shouldn’t be a reason to withdraw from the business. We understand that tackling this market research on your own can be overwhelming. This is where some fundamental questions arise: Do I need guidance? From whom? Is it important to have outsourced accounting services near me?
Of course, having professionals who focus on providing customer service strategies and resolving industry challenges can assist you and make the difference between a successful decision or not. The world of oil can be complex, but with the right help, it can not only become simpler but also very profitable.
How to invest in gas and oil
There are many types of oil and gas investments, but they are commonly divided into two main branches, which are further subdivided: direct investment and indirect investment.
Investing in oil directly
Direct investors are willing to take on the added risk associated with futures, options, and speculation.
Oil funds
This is done through commodity-based exchange-traded funds (ETFs). Oil ETFs trade on the stock exchange like stocks and track the performance, minus fees, of an underlying commodity index, such as a crude oil index.
The fund’s investment objective is to provide daily investment results corresponding to the daily percentage changes in the spot price of West Texas Intermediate (WTI) crude oil.
Oil futures
Oil futures are contracts in which two parties agree to exchange a specified amount of oil at a predetermined price on a specified date. If the price of oil rises, the contract can increase in value, and the contract owner could sell it for a profit. If it falls, the contract could lose value, and the owner could lose money by selling it.
The two most popular types are Brent crude and West Texas Intermediate (WTI), traded on the Intercontinental Exchange (ICE) and the New York Mercantile Exchange (NYMEX), respectively.
Oil options
An oil option is like a futures contract, but there is no obligation to trade if you don’t want to. You have the right to buy or sell a quantity of oil at a fixed price on a specified expiration date, but you are not obligated to do so.
There are two types of options: call and put. If you believe the market price of oil will rise, you can buy a call option. If you think it will fall, you would buy a put option. You can also sell call and put options if you want to take the opposite positions.
Investing in oil indirectly
Investors who prefer indirect exposure to oil are typically those who do not want the added risk of direct exposure to oil as a commodity.
Energy ETFs
For example, an energy sector mutual fund or ETF is a way to get broad exposure to oil and energy stocks with less sensitivity to oil price fluctuations than direct investment. They exclusively invest in securities of oil and oil service companies and have lower volatility.
Some examples are iShares Global Energy ETF (IXC) and T. Rowe Price New Era Fund (PRNEX).
Oil stocks
Investors can also invest indirectly in oil by buying shares of specific oil companies. There are three types of oil companies: exploration and production, which drill for oil; transportation, which operate pipelines and pipelines to transport crude oil; and refining and selling, which refine and sell end products.
How much money do I need to invest in oil?
Investing in oil is not just for the wealthy, it can be affordable. Several well-known oil stocks often trade below $100 per share. ETFs are another inexpensive way to invest in oil. ETFs are traded on the stock exchange, and investors can buy individual shares of an ETF as if they were stocks.
And remember: the liquidity of oil is given by its sector. Gas and oil are major energy generators, and outside of electricity, it is very difficult to think of large alternatives globally. That’s why these raw materials are in demand worldwide to keep the economy afloat, and that’s why oil is traded in immense and constant volumes.
For now, our society depends on it for everything, from commuting to work to heating homes, making it a precious but finite resource.
