How to Invest in a Gold Stock

With the increasing sense of instability in world, given terrorist threats, war and natural disasters, the falling dollar and the current vulnerability of the U.S. economy, many people are looking to gold as a way to invest in a world of conflict. Gold has been seen as the ultimate shelter from many a financial storm, and gold stocks can provide almost as much stability as gold coins. So many gold stocks are available that the new investor may well wonder which gold stock to choose.

Instructions

1. Create a list of gold stocks. You may get some suggestions from friends or read about a gold stock on a financial site. Add the names to your list and do some online research on each of the companies.

2. Categorize your gold stocks. You will want to make a pyramid, with most of your money invested in the more stable, well-known gold companies, a smaller amount in out-of-favor stocks with potential, and the smallest portion invested in speculative, relatively unknown names with huge upside gains.

3. Find out each company's costs. You should know how much the company spends on mining gold. Low-cost mines may use cutting-edge technology to mine gold at a lower cost. This also may involve risk.

4. Take leverage into account. Mining costs are not the whole story. A mining company that has higher costs may be able to use its resources to create more profits. High-cost mines may also be able to retrieve gold from hard-to-reach areas and make more money for investors.

5. Look at gold reserves. One company may have huge profits for the year but lack reserves, while another company may be lagging behind but may have a huge upside potential in the form of gold reserves. These reserves are almost like having money in the bank.

6. Consider the stability of the company and the region. A company may have huge reserves but may be located in a region of world that is vulnerable to corrupt regimes and revolutions. Your money may go down the drain if you invest in a great speculative company that ultimately falls under the control of a dictator.

7. Weigh your options. Take all of the above factors into account and to decide which are the best gold stocks on your list.

8. Diversify your risk. While the majority of your money should be invested in safe stocks, add a few speculative plays to keep things interesting. However, stick to the pyramid and distribute your risk.

Tips & Warnings

• Invest also in gold coins. Some say you should own more gold coins than gold stocks but having both is important.

• Sell a little "off the top" when you make a major profit in a stock and let the rest run.

• Beware of hedging. When a company hedges, it sells its future "profits" and can wind up in debt. Hedging robs the company of profits and is bad for shareholders, so only invest in hedged companies with caution.

• Don't invest more than 20 percent of your money in speculative stocks.