Investing in the oil and gas industries is not a complex financial activity. These are very lucrative sectors that offer various methods of entry, which makes it easy for beginner investors to pick and choose according to their trading style and personal approach to finance.
The first thing to learn about oil and gas is that they are prized commodities subject to the principles of supply and demand; therefore, their value will vary in accordance to the principles of supply and demand as well as the geopolitical climate. The second aspect to learn is the different methods of investing, which are listed below:
Futures
Oil and natural gas are two of the most actively traded commodities in the world, and it is often traded by means of futures contracts. There is a certain level of risk involved when trading futures contracts, which could possibly expire devoid of worth. Within the world of futures contracts, potential investors can also find options, which are derivatives of lesser value that also bear the risk of possibly expiring without value.
Stocks
There are hundreds of publicly traded firms around the world dedicated to the exploration, extraction, and delivery of oil and gas. By virtue of being listed on major stock exchanges, investors can purchase and trade shares of large companies such as Amoco and ExxonMobil. Investors based in the United States can also take positions in foreign firms such as PetroChina and British Petroleum through American Depositary Receipts (ADR). Smaller companies in the oil and gas sectors are also traded on financial exchanges designed for smaller capitalized firms.
Mutual and Exchange-Traded Funds
Many investment funds focus their portfolios in the oil and gas industry by taking managed positions on several companies and exploration projects. These energy funds are often recommended to beginner investors due to their professional management features and the long-term tax advantages. With exchange-traded funds (ETFs), investors can take a stock-like approach to trading that does not involve a lot of paperwork or financial commitment. The best part about oil and gas funds is that they are managed in such a way as to not put all eggs in one basket, which means that investors can enjoy diversification.
Direct Investments in Oil and Gas Enterprises
Beginner investors who are fast learners, and who also have a higher tolerance for risk, can also research opportunities to invest directly in exploration and developing projects. The latter enterprises seek to extract more oil and natural gas from land that has already delivered; the former seek to acquire or lease land that can be explored and drilled. These investments are not tradable securities, but they can be very profitable; one example is LightningEnergy of Dallas, Texas. Lightningis an active participant in developmental projects in the U.S., and they focus on enhancing total return for investors.
Another method of direct investment consists of looking for opportunities in companies that provide logistics and support to the oil and gas industry. These investments are less sensitive to fluctuations in the pricing of oil and gas, but their success depends on sound management and the competitive outlook of the industry.
In the end, beginner investors can approach the oil and gas industries with the confidence that they are venturing into a market of long-term growth on a global basis, but they should also remember that these sectors are hardly linear. All commodities are subject to supply, demand, geopolitical issues, monetary policy, and market volatility; hence, money management and risk mitigation should be carefully considered at all times.
