How to Invest in Natural Gas

Natural gas has long been used in homes for heating and to power stoves and ovens. It’s also burned in some power plants to generate electricity. Because it is in abundant supply in the United States, it’s increasingly viewed as a means to limit dependence on foreign fuel sources. Additionally, as the world shifts towards cleaner fuels, natural gas is increasingly being viewed a cleaner alternative to gasoline and diesel.

Things You'll Need

• Capital to invest
• Stock broker or online brokerage account
• Futures trading and margin account (optional)

Instructions

1. Speculate on futures. The most advanced traders speculate on short term moves in the futures market, which is the most direct way to invest in natural gas. Futures contracts for delivery of 10,000 million British thermal units out to 36 months in advance trade daily on the New York Mercantile Exchange.

2. A much safer and easier way to participate in the rising value of natural gas is through the US Natural Gas Fund, which trades under ticker symbol UNG. Like all ETFs, UNG can be bought and sold like a stock, never expiring or requiring delivery like a futures contract. UNG also offers an option chain for investors looking to use puts or calls to trade natural gas.

3. Another common way to gain exposure to natural gas is through the companies that drill take it out of the ground. Generally, as the value of the product increases, these companies experience expanded margins and increased profits. The most speculative companies merely explore for and identify natural gas deposits, selling property to or partnering with drillers for the actual production stage.

Tips & Warnings

• By far the least risky way to play natural gas is through UNG. Only advanced traders should attempt to trade futures. Natural gas drilling stocks can offer more profit potential than the commodity itself, with moderate risk.

• Weekly inventory reports have a tremendous impact on the natural gas market and related investment vehicles, as do similar reports on crude oil and fuel distillates.

• In addition to fluctuations in the price of natural gas, drilling stocks also carry company specific risks. All the rules pertaining to investing in stocks, particularly understanding a company's business and balance sheet, apply to investing in natural gas drillers.