How to Invest In Energy
The demand for energy is a worldwide phenomenon. The rising costs of traditional sources like fossil fuels, along with environmental concerns, are stimulating the growth of the alternative-energy sector. However you slice it, opportunities for energy investors are expanding, and it appears they will continue to do so for many years to come. For the newcomer to energy stocks, this may be a bit overwhelming. How do you sort out everything that’s going on and make wise choices when you invest in energy?
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Things You'll Need
- Brokerage account
- Understanding of the energy industry
- Knowledge of individual firms or mutual funds
Instructions
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Study up on the energy industry. The methods used to produce energy are becoming more diverse, with traditional sources such as coal, oil and hydroelectric power facing competition from solar energy systems and wind power, among others. Technology is changing rapidly and affects the potential profitability of different companies. You also need to be familiar with political and environmental issues that shape policies affecting energy companies.
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Consider the benefits if you invest in energy through a specialized mutual fund. “Green funds” are becoming popular because they offer the opportunity to invest in energy in a way that is good for the environment without having to research each company individually. Carefully evaluate a fund before you invest. Choose a “no-load” fund (one that does not take part of your investment capital up front in fees). Examine the fund’s performance over the last five years. And compare it to the overall market performance as measured by well-known indicators like the Standard & Poor’s average. You want a fund that consistently outperforms the market. Check out the fund’s management. Recent changes may be a danger sign if a new fund manager lacks experience or a track record comparable to the fund.
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Decide if you want to invest in energy companies that are traditional providers or in alternative-energy firms. Older technologies like coal and hydroelectricity have the advantage of being established. They carry less risk, but they do not have the growth potential of companies moving into the alternative-energy sector. If your goal is a good return with minimal risk, the older companies are probably best. If your personal financial strategy calls for concentrating on growing your portfolio, alternative energy stocks are likely to be preferable.
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Look carefully at utility power companies if you want to invest in energy. Electric power companies like the Southern Company and Pacific Power offer solid returns with a high degree of stability and are ideal choices for a portfolio intended to produce cash income. They have other advantages, as well. Electric utilities are not as vulnerable to volatile price fluctuations as is the oil industry. Also, ore-progressive power companies are investing in alternative energy, increasing their potential for long-term growth.
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Invest in energy for growth with wind-power firms. In 2008, 1 percent of the electric power in the United States came from wind. That figure is expected to rise to 20 percent by 2030--growth requiring an estimated $500 billion in new capital. Older firms like General Electric are already vying with newcomers like Babcock and Brown Wind Power to get in on this part of the energy industry. See the link at the end of this article for information on more wind-power stocks.
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Choose the high-technology route by investing in solar energy companies. Solar energy is tremendously attractive, not only because it has little or no environmental impact, but also due to its low operating cost. The major obstacle to large scale use has been the high cost of the components for solar systems. But from 2000 to 2006, that cost dropped by half and continues to decline as high-tech firms bring advanced technology to the industry. Examples include Sunwize Technologies, Borrego Solar and Eli Solutions, all of whom market to residential and business energy consumers. Use the link at the end of this article to find information about other solar energy companies.
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