Knowing how to invest in oil can be tricky for individual and professional investors alike. The safest investment choices often offer the least potential for profit, while more profitable ones deal with the possibility of large oil price fluctuations that can sometimes occur on a daily basis. Nonetheless, if one is willing to invest in oil and is open to incurring the risk, investing in the petroleum market can bring rewards.
Purchasing stock in an oil company is probably the safest bet for the risk adverse investor since the value of the stock reflects the profits of the company instead of the direct price of oil. Hundreds of companies are listed on U.S. stock exchanges and some of the larger ones pay generous dividends on average of about 5 percent. Oil sector mutual funds, another way of indirectly investing in petroleum, pool money from several investors together, and since they allow small investors the opportunity to invest in a diversified and professionally managed portfolio of oil related securities, they also involve a minimal amount of risk.
An exchange traded fund (ETF) is a type of investment that is traded like shares but directly reflects the price of oil. If the price rises, the value of the ETF rises proportionally. Unfortunately, the opposite is also true, and one can lose money if prices are forced downward. In an even riskier type of investment known as spread betting, an investor makes a bet on the future movement of the price of oil. If the price moves the other way, however, you lose money. Spread betting should be avoided unless an investor fully understands the implications involved and has taken appropriate precautions to limit potential losses.
A direct participant program (DPP), in which an investor owns a portion of an oil producing property, can be highly profitable if one can afford the initial investment. Since the property has already been proven to produce crude, there is virtually no risk involved. Typical wells can yield returns of 15 to 25 percent or more annually. Unfortunately, DPP’s require a minimum of $10,000, with more typical investments running into the $20,000 to $30,000 range.
For those who wish to invest in oil, the market offers an array of options. Be thorough in your research or speak with an investment professional before committing your money. Knowing how to invest in oil is sure to help maximize your investment and help you avoid losses.