What to Consider When Making an Oil and Gas Investment

If you are looking to become an investor, you should try investing in the oil and gas industry.

If done right, an oil and gas investment can be very lucrative. If not done right, making an oil and gas investment can cause you to lose large amounts of money fast.

To help you learn how to invest in oil and gas, we are going to go over all the different forms of gas and oil investments along with the benefits and disadvantages that can come with gas and oil investments.

Get ready to become a top-notch investor!

Capital Inducing Forms of Oil and Gas Investment That You Should Consider

There are many ways to make an oil and gas investment. When deciding which way you are going to go with, consider the risk levels of each. To help you make an informed decision, we are giving you detailed information on some of the top ways people are making gas and oil company investments today.

1. Mutual Funds or ETFs

A classic and low-risk way to make an oil and gas investment is to buy shares in mutual oil and gas funds or exchange-traded funds (ETFs). An oil and gas fund is a pool of money created to invest in the oil and gas sector.

An exchange-traded fund is an investment fund that is traded over the stock exchange. By investing in mutual oil and gas funds or exchange-traded funds, you gain exposure to the oil and gas industry commodity without having to directly deal with commodity spot prices.

In case you were wondering, a commodity is a raw or precious material. In other words, the raw oil and gas.

A commodity spot price is the price at which a commodity could get traded in the marketplace. Commodity marketplace trading can occur at any given time.

2. Large Cap Stock Investments or ADRs

Large-cap stocks are stock investments in companies that are worth more than $5 billion dollars. Examples of large-cap stock oil and gas companies include Exxon Mobile, British Petroleum, Chevron, Royal Dutch Shell, and more.

ADRs are American forms of equity security. American equity security represents one or more shares of foreign company stock held in an American bank in the foreign country’s home stock market.

3. Purchase Future Contracts

If you are willing to take on its high risks, you can invest in oil and gas by purchasing future oil and gas contracts. When investors buy a contract it means that they plan on selling a stake of the oil commodities by a certain date. Essentially, these investors are betting on what the prices of oil and gas will be in the near future.

If the prices of oil and gas end up increasing, the investor that bought an oil and gas contract will make money. On the other hand, if the prices of oil and gas end up decreasing, the investor that bought an oil and gas contract will lose money. The catch is, though, that the contract investor still has to make good on his or her contract’s promises even though it will cause him or her to lose money.

Investing in future oil and gas contracts is risky because the amount of money you can lose when the prices of oil and gas decreases can be tremendous.

4. Invest in Smaller Company Stocks and Limited Partnerships

You can accomplish this form of an oil and gas investment by investing in a stock to a smaller oil and gas company or project. Another term for a stock with a small market capitalization is a small or micro-cap stock.

If you buy a stock from a publicly-traded company that is worth less than $2 billion dollars, then you have technically invested in a small-cap stock. If you buy a stock from a company that is valued between $25 million and $300 million dollars, then your investment is technically a micro-cap stock.

Making small or micro-cap stock gas and oil company investments is less risky than buying a stock in a major oil and gas company. Thus, if you are a beginner oil and gas stock investor or you have a more risk-averse personality but still want to buy stock in an oil and gas company, this could be the way for you to do so. One benefit of a small or micro-cap stock investment is the unlimited growth potential of these companies.

Even if the small or micro-cap company that you invest in does not end up turning into some huge oil and gas company powerhouse one day, it can still be successful enough to be bought out by a large oil and gas competitor company. If this happens, you as a stockholder of the original small or micro-cap company will still make a lot of money.

The large amount of money stockholders in a small or micro-cap oil and gas company that is bought by a larger competitor make is due to acquisition premiums. This is because these acquisition premiums offer investors multiple times the amount of money of the company’s original stock price.

Benefits to Consider When Investing in Oil and Gas

There are numerous risks that come with making oil and gas investments. To show you that investing in oil and gas can be worth those risks, we have given you information on some of the benefits of oil and gas investments.

1. Diversification

It is always good to diversify your investments. In business, diversification means that your financial winnings are not all based on one thing or result.

It is easy to diversify your money in oil and gas investments because even when oil and gas prices are rising due to issues getting the oil and gas, oil and gas stocks often rise with those prices. Thus, despite how you chose to invest in the oil and gas industry, there is a chance for you to have cash flow.

2. Tax Deductions

Because the oil and gas industry experiences gradual depletion of minerals and resources, the IRS allows oil and gas investors to have tax deductions. You should definitely consider this benefit if you plan to be an oil and gas investor that is a member of a limited partnership. This is because depletion can make all the difference in you making money.

3. Big Profits

At the end of the day, gas and oil company investments can make you a huge profit. This is especially true if you are investing in a smaller gas and oil company. The amount of money that you can make if the company you invest in strikes oil or gas is so great that it is worth the risk.

Disadvantages to Consider When Investing in Oil and Gas

Just like the rewards of being an oil and gas investor can be great, so can the losses. To ensure that you consider the cons of being an oil and gas investor, we are telling you all about some of the things that can cause you to lose money.

1. Volatility

Volatility is the ability to change from a good situation to a bad situation fast. When it comes to investments, high volatility can cause investors great financial losses. The high volatility of oil and gas investments is a risk you must consider.

2. Encountering a Scam

Oil and gas scammers trick investors into investing in fictitious oil company stocks and exploration projects. Encountering a scam in investments that are as expensive as oil and gas can be financially devastating. To help avoid encountering oil and gas investment scams, do extensive market research on all facets of the oil and gas companies, projects, wells, and explorations that you plan on investing in.

3. Unstable Politics

When there is are oil or gas investments in a politically unstable location, there can be changes in energy trading or geology at any given time. Thus, beware of where the oil or gas companies that you invest in are located.

4. Geological Risks

When the terrain of a place makes it hard to extract oil and gas, the chances of success of any oil and gas drilling and exploration immediately goes down. That is why investors should research the geological location of where the drilling of the oil or gas that they plan to buy stocks in takes place prior to investing.

5. Oil Spills, Fires, and Gas Accidents

When investing in oil and gas, you should always consider the risk of there being an accidental oil spill, fire, or mishandling of the gas. These accidents can make an oil and gas investor lose tons of money.

Do You Have What It Takes?

Now that you have considered some of the main ways to make an oil and gas investment and the pros and cons that come with making an oil and gas investment, it is time to make a decision. Only you know if you are ready to become an oil and gas investor or not.

To learn more about finances and the oil and gas industry, check out our other blog articles.

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