Investing in oil may seem like something well out of the reach of the rank-and-file investor. You don’t need a lot of money to invest in oil, however. You don’t have to be an oil well-owner. You don’t even have to take physical reception of oil or oil-based products to get involved in the oil market. Read on to find out how you can invest in oil affordably and relatively easily.
What you Need to Know about Oil before Investing
Crude oil is an essential but volatile commodity. Geopolitical issues can have a significant impact on the oil price.
There are many investment products tied to oil and oil production that don’t require investors to take physical reception of oil.
Those who can buy oil and store it physically can invest on the spot market. This investment method is not an option for the overwhelming majority of investors.
Oil Futures and Oil Futures Options
Most experienced commodity investors use oil futures or oil futures options to invest in oil.
To trade oil futures online, you must pass a suitability review and obtain margin. You also need experience, trading skills, and expertise. Oil futures and futures options are not for beginner traders.
Trading oil through a full-service broker is also an option. Such brokers feature commodity trading advisors who can give you custom advice on when and how to invest in oil futures and futures options. Commodity trading advisors carry a license from the National Futures Association.
Some futures contracts may involve the transfer of physical goods, but most are cash-settled.
Gaining exposure to oil is also possible through the stocks of an oil producer or another company involved directly in producing, handling, and processing oil. Investors can buy such stocks the same way they would buy tech stocks or other traditional stocks through an online or live brokerage.
ETFs and ETNs
Exchange-traded Funds and Exchange-traded Notes are derivatives that also offer exposure to oil and other commodities.
Crude oil ETFs track the price evolution of the underlying asset, but they may encounter tracking errors stemming from technicalities such as rolling over expiring futures contracts, etc.
If a commodity ETF can track its underlying asset within a 10 percent margin of error, it is an accurate investment vehicle as oil ETFs go.
Energy Sector Mutual Funds and ETFs
Investing in energy sector stocks may result in lopsided exposure. Mutual funds and ETFs can provide some diversification while keeping investments in the energy sector.
Energy mutual funds make their investments in oil and other fossil fuels. They aim to create diversified portfolios, so buying into such funds saves investors the headache to diversify their portfolios manually.