How to Invest in Crude Oil

There are several different ways to invest in crude oil. The risks and the rewards can vary widely depending on your goals, temperament, ability to handle risk and your level of investment experience. One thing that will remain constant for the foreseeable future is the impact that changes in oil prices have on the world's economies. Oil is still one of the primary motivators that makes the world go round.

Things You'll Need

• Stock or commodities account Money or other assets

Instructions

1. Buy stock in individual companies such as Exxon Mobile or Chevron. Often such stocks pay a quarterly or yearly dividend, so your investment in such companies could provide you with an income for many years to come. However, oil companies are not required to pay dividends and may lower their dividend payments or cancel them altogether with little or no notice.

2. Purchase options on individual oil companies. Options can be a low-priced way to play the short-term changes in the price of an oil company's stock. Options give you the right--but not the obligation--to purchase stock in a company at a specific price (the strike price) for a specified length of time (the expiration). Options are much less expensive than the stock itself and their value can change a great deal with even a small change in the value of the stock itself. Options also allow you to make money if the price of the company's stock goes up (a call option) or if it goes down (a put option).

3. Purchase a futures contract. A futures contract gives you control over 42,000 gallons of crude oil. If the value of crude goes up then the value of your futures contract also rises. If crude drops in price then the value of your futures contract drops. Purchasing a commodities futures contract on crude oil should not be attempted unless you have some investing experience.

4. Purchase stock in the OEX. The OEX is an index of oil companies. The price of an OEX share is determined by averaging the prices of several different oil and oil-related companies. You can purchase shares of the OEX through any stock trading account, and you can purchase options on the OEX as well.

5. Invest directly in a specific oil well or in a small wild-cat oil drilling company. This can be the most risky form of crude oil investment, but it also holds the promise of the biggest potential reward. In essence you are buying a percentage interest in a potential oil well or in a potential oil-rich property. If a successful well is drilled and oil is struck, your fortune could be made overnight. If the hole comes up dry, however, your entire investment could be lost.

Tips & Warnings

• All investments are risky. Do not invest in crude oil in any form unless you understand the risks and the rewards. It is possible to lose your entire investment account and to lose even more than your entire investment account if you trade on margin. Stock, option and commodity investments are not right for everyone. Past performance does not guarantee future results. Futures and options are especially volatile due to the high level of leverage that they command. Investments in these vehicles requires specific investment knowledge.