(Newswire.net — February 15, 2023) — Investors can access oil directly or indirectly. Like any other investment security or type of asset, this commodity has unique risk qualities that investors need to understand before buying.
Below you’ll find out how to invest in oil safely and efficiently.
Getting direct contact with oil
Investors can access oil directly by buying futures or options contracts or by buying exchange-traded funds or commodity-based mutual funds. Futures and options can be complex and carry a high degree of risk, while ETFs and mutual funds are relatively simple and carry moderate risk.
Oil futures
They require the buyer to buy an investment security or sell it on a specified expiration date. Otherwise, the position will be closed on the expiration date. When it comes to oil futures, investors are rarely going to take ownership of an asset.
Oil options
This method gives the buyer the right to buy (call option) or sell (put option) the underlying asset, in this case, oil.
Commodity funds
Allows an investor to buy shares of an ETF or mutual fund that tracks the performance of an underlying commodity index, such as the crude oil index, minus fees.
Investors that are willing to assume the additional risk involved with futures, options, and speculation are the ones who commonly engage directly in oil. Commodities like oil and others can be utilized for hedging and diversification strategies.
Indirect oil investments
Indirect oil investment will not directly track the price of oil as a commodity but will invest in stocks that can be affected by oil prices. To gain indirect access to oil, investors can buy stocks in a mutual fund or an oil ETF that invests in stocks in the oil industry. Oil and exploration funds and funds for the energy industry are two examples.
Also, you can acquire shares of individual oil companies. There are three types of oil companies:
- oil exploration and production companies that are engaged in oil production;
- midstream companies operating crude oil pipelines;
- downstream companies that process and sell the final products.
Investors who prefer indirect access to oil generally do not want the additional risks associated with direct access to oil as a commodity. One approach to get broad exposure to oil and energy stocks with less vulnerability to oil price movements than direct oil investment is through an energy sector mutual fund or ETF, for instance.
Bottom line
Investors can access oil directly by buying oil futures or options or indirectly by buying oil stocks or shares of mutual funds or ETFs that invest in oil stocks or the broader energy sector. But investing in oil comes with additional risks that investors should be aware of before buying.
To research oil investments, investors can use a number of research tools, including stock research websites, investment research software, and reading commodity news outlets. Traders can also explore various industry funds that invest in commodities and the energy sector.
Follow your risk management strategy, and your funds will be safe.