Invest in Oil: Everything a Newbie Investor Needs to Know
There's a reason that wars are fought over oil. It's an extremely valuable commodity, and everyone wants a piece of the pie.
On average, 92 million barrels of oil were pumped out of the earth each in 2017. This placed the oil market's worth at a whopping $2,5 trillion (and counting).
Yep, the oil market is pretty massive and, as such, this makes it a daunting place for first-time investors.
But if you're looking to invest in oil and need a little advice on where to start, this guide should help.
A Beginner's Guide on How to Invest in Oil
If this doesn't scare and excite you as a potential oil investor, then here is your warning!
One thing that's important to know is that oil investing is volatile as the market is complex and fluctuates day-by-day. What also complicates things is the various investment options potential investors have to choose from.
These can range from oil futures contracts, mutual funds, exchange-traded funds, and oil gas and stocks. So, where do you even start?
Oil Supply and Demand
One of the best places to start is by understanding the dynamic between global oil supply and demand.
The relationship between the two plays a massive role in determining the volatility of the market as well as the price of oil per barrel.
Basically, when oil supply matches oil demand, prices tend to stay above production costs. This means that oil producers can make a profit and sell their oil at a more reasonable price.
This is the ideal scenario for an oil investor, as crude prices are high enough so that oil producers can generate enough profit. This, in turn, keeps oil prices relatively stable.
When this balance is thrown off, oil prices can fluctuate dramatically.
A Beginner Investor's Warning
For all newbie investors, this a warning that oil may not be the best place to begin your investing enterprises.
As mentioned, oil is subject to major price fluctuations, some as massive as a 50 percent decline in oil holdings overnight. More often than not, these kinds of fluctuations are commonplace.
Investing in oil requires a very hands-on investment strategy. In other words, an oil investment requires precise decisiveness on when to buy and sell.
Unlike index fund investments where a computer automatically invests your money across the stock market, oil investments require close attention.
If you're a full-time investor and this is your chosen career choice, then you have the time to monitor your oil investment. If not, beginner investors beware.
Make Oil a Small Part of Your Portfolio
If the above warning has not put you off, then a good place to start with oil investing is with a small piece of the pie. A sliver, in fact. Even the most experienced investors will typically invest a small percentage of their overall portfolios in oil. So it's best to follow suit.
As a general rule-of-thumb, it's never a wise move to invest an entire portfolio on a single commodity, most especially one as volatile as oil.
To start, invest only 2-5 percent of your portfolio on a commodity such as oil. This way, when the market plunges you only lose 2-5 percent of an overall investment portfolio.
When oil prices skyrocket (and they tend to do this too!) then you can reap the rewards.
Purchase Oil Stocks Directly
One of the most simple and straightforward ways to invest in oil is buying shares in an oil producer such as ExxonMobil, Chevron or British Petroleum.
Depending on when and how their share prices fluctuate, you are only affected by how many shares you purchased in the company.
Purchase an Oil Exchange-Traded Fund
For a more diversified approach, you can also spread your investment capital across a number of oil securities. This means you aren't investing too much time or money in one singular category.
Common oil exchange-traded funds include the United States Oil Fund, S&P Global Energy Index Fund, and WTI Crude Oil Fund.
This kind of investment is ideal for a long-term investment strategy, similar to an index or mutual fund investment.
Purchase Oil Futures
Oil futures are recommended for advanced investors with a little more time and investment knowledge on their hands. These contracts basically allow you to buy and sell oil and hopefully make a profit based on your own predictions of the oil market.
Oil futures contracts can be complex to decipher if you're not well-versed in contractual jargon. This is why they're not recommended for beginners.
To add to this, most futures contracts require a minimum buy-in investment of $10,000 or more.
Look For Commission-Free Advice
If you're very serious about investing in oil, whether you're a beginner or not, it's always important to seek out impartial advice about your investment. Impartial advice is defined by a person who is not going to profit or receive any form of commission by selling you an oil investment. It's important for beginners to know this!
In short, it's unethical for a broker to recommend an investment where they're going to make a massive commission because of your commitment to it.
Make sure to seek advice from a financial planner or investment advisor who charges a nominal fee for their expertise and guidance.
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