How to Buy Gold Mining Shares
Gold mining companies are involved in the discovery and processing of gold deposits. To help finance these operations, most issue shares on publicly traded exchanges that give owners a part of their profits. Many use the value of the copper, silver and other secondary minerals found with gold to offset the cost of their mining activities. When the value of these commodities rise, the miners typically experience expanded profit margins and increased earnings. However, because mining involves inherent risk, many factors other than the price of metals often impact the value of mining shares.
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Instructions
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Allocate funds. Before purchasing a single share, decide how much money to allocate to a position in gold mining shares. A common rule of thumb is to have a minimum 10 percent of a portfolio in precious metals, but because of the other risk factors particular mining companies, less than half of the precious metals allocation should be mining shares.
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Pick stocks. For some, a single large cap mining company will fill the mining allocation in their portfolio. These global firms usually offer stable if slow growth and a safe dividend. Other investors may choose to diversify within the mining sector to minimize company specific risk, or speculate in younger, unproven companies. Factors to consider in choosing mining stocks are debt, cash flow and mineral reserves. Junior miners may have an impressive list of properties, but will have to assume significant debt to initiate actual production. Exploration companies sink or swim on their ability to locate commercially viable ores they can sell or lease to larger companies with means for production.
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Use ETFs and mutual funds. Those left confident in their stock-picking skills should utilize one of several gold mining funds that track a basket of gold miners. The most popular of these are the AMEX Gold BUGS Index , trading as ticker symbol HUI, the Philadelphia Gold and Silver Index, XAU, and the Market Vectors Gold Miners ETF, ticker symbol GDX. A number of mutual funds concentrated in gold mining shares are also available.
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Tips & Warnings
At the very least, read the company's quarterly and annual reports. Know where its mines and other facilities are located and what the potential risk factors may be. An experienced, successful management team is also usually necessary for a profitable mining venture.
Miners, particularly ones with global reach, are subject production shortfalls, fluctuating energy and labor prices, labor and governmental disputes, and environmental and other lawsuits. These risks can effect stock price suddenly and without warning.
Resources
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