How to Invest in Oil: 4 Ways to Start
Read on to find out how you can invest in one of the biggest commodities on the market.
Investing in oil doesn't mean going to the gas pump, filling up a few gas cans and selling them to your friends or neighbors if the price goes up. Just like stocks and other securities, you can invest in oil through your brokerage account.
Why Should You Even Consider Investing in Oil?
Oil is one of the most important driving forces of the economy. It enables shipping and transportation. It powers factories and, most likely, your car. Oil companies will continue to remain near the top of the list of the most valuable businesses in the world, even when oil prices falter over concerns about the impact of political events or the COVID-19 pandemic. Why? Because there will almost always be demand for the black gold.
If you want a slice of the profits from the lucrative oil and gas industry, you have a handful of choices for putting this precious resource in your portfolio.
How to Invest in Oil
It's effortless to buy the stock of an oil or gas company using a brokerage account. Because these and other big oil companies trade on the major stock exchanges, you can buy and sell shares with no transaction fees. To do that, you need an account with one of the popular brokerages such as Ally Invest or Merrill Edge.
1. Invest in an Energy-Focused ETF or Mutual Fund
Exchange-traded funds (ETFs) and mutual funds allow you to buy a basket of investments in one purchase. There are many funds to choose from in this arena. Some give you exposure to a set of stocks or oil and gas commodities. But others focus on particular regions or types of oil. Some of the top energy indexes that you can invest in include the S&P 500 Energy Index (SPNY) and the Vanguard Energy Index Fund (VDE).
While stocks are going up and down with the company's performance and expected results, commodities are generally considered to be riskier than stocks. When you read that the price of oil is going up or down, the oil commodities are what they are talking about.
Motif is a unique investment company that also gives you an ability to invest in multiple stocks at once. If you want to create your virtual ETF of oil stocks, Motif could make it work.
2. Trade Oil Options and Futures
Expert and professional investors often look to options and futures as a way to earn a profit in the commodities markets, among others.
If you don't know much about options or futures, make sure to sit down and study before diving in. This type of investment is an extremely risky way to invest if you don't know what you're doing. Even if you do, there's a good chance you'll lose money trading options and futures, so be fully aware of the risks when going in.
Most brokerage firms dropped the base fee for options trades in 2019, but you'll still pay around 50 to 75 cents per contract. Futures contracts cost around $1 to $2 each.
This can give you direct investment exposure to oil. When prices go up and down, so will your investment. Depending on your brokerage, you may need additional approval for options trading. This is not for people wanting to know how to invest in oil with little money. It is best for people who have significant assets. You should invest only what you can afford to lose if things don't work out as expected.
3. Invest in MLPs
For those who want to know how to invest in oil wells, this is one of the more direct options. “MLP” is short for Master Limited Partnership. An MLP is a type of business entity that's publicly traded like a stock. But there are some key differences to understand.
MLPs give you the tax benefits of a private partnership. This means you pay taxes only on distributions. But you can buy and sell with the liquidity of a public company. Investors are considered “partners,” although most investors don't have an active role in the venture.
MLPs are best for investors looking to earn cash flow from their investment. They're not as volatile as commodities in many cases. But they have some unique tax reporting rules and don't usually appreciate in value all that much. This makes them more of a niche investment than regular oil stocks.
4. Buy Stock in an Oil and Gas Company
If you want to invest in oil with little money, the best place to look is probably your brokerage account. With the new advent of no-fee stock trades at all of the big brokerage houses, you can buy shares of stock without worrying about fees cutting into your investment.
Some brokers allow you to buy fractional shares, which means you don't even need the cash to buy a full share. M1 Finance is an excellent broker to get started with fractional shares (here's our review).
If you think oil prices are on their way up, investing in oil and related companies can be a smart move. Some of the top oil companies you can buy shares from include Exxon Mobile, Royal Dutch Shell, Chevron, BP, and Total S.A. Investing in oil companies directly gives you exposure to the energy market without having to buy oil directly.
However, as with all investments, make sure you understand the potential gains and risks before clicking the “buy” button.
My Personal Experience with Oil Investing
In January 2016, oil and gas prices and stocks looked to be at a low point. After a quick chat, my wife and I decided it was a good time to buy into oil and gas. We chose to do so through a semi-diversified purchase of three stocks.
We purchased shares of Chevron (CVX), Conoco Phillips (COP), and Exxon Mobil (XOM) and still hold them in our joint portfolio. Since we first invested in these companies, we've received a trickle of cash flow from the stocks' dividends. If you add up the performance of all three stocks, we have a nice little gain in our portfolio.
Today, oil prices have gone down again due to the coronavirus outbreak bringing global air travel to a halt and closing businesses. Russia and Saudi Arabia have also ramped up production in a price war, exasperating the pressure on crude oil prices. The lower prices could be an excellent time to buy into the market if you're prepared for prices to stay low in the near-term future.
