How to Buy Oil Stock as a Small Investor
Oil companies drill for oil, refine oil into gasoline and other fuels, and sell the end products to consumers. Large companies, such as British Petroleum and Exxon-Mobil, are fully integrated companies, covering all aspects of the oil sector. Smaller companies focus on oil and gas exploration or refining oil into petroleum-based products. The small investor can have a diversified exposure to the oil companies.
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Instructions
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Determine how much money you want to invest in the oil and gas sector. Many online stock broker accounts require a minimum deposit of $1,000 to open an account. This is enough money so that broker commissions do not eat up too much of your profits.
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Exchange traded funds or ETFs offer diversified funds in focused sectors. The data section at IndexUniverse.com allows you to screen ETFs by sector. A selection of energy sector ETFs gives a choice of 16 different funds. The energy sector also includes companies that provide energy through coal, nuclear power and alternative energy.
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Narrow down the energy sector ETFs by entering the fund symbols at ETFConnect.com and reviewing the top stock holdings. For investors in ETFs, a large asset base and low expenses are benefits. Two energy ETFs that give the best exposure to oil are the SPDR S&P Oil and Gas Exploration and Production ETF, symbol XOP, and the Energy Select Sector SPDR Fund, symbol XLE.
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Be aware that of the two funds, XLE has higher exposure to the large, integrated oil companies and is less volatile. XOP has more exposure to riskier stocks and has had larger moves in both the up and down directions. Determine which fund fits your investment philosophy or decide to split your investment between the two funds.
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Place the order through your online broker account. It is not necessary to purchase in round lots of 100 shares. These ETFs will give you an investment in a broad portfolio of companies in the oil business.
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Tips & Warnings
The ETF USO can be used if you want a fund to track the price of crude oil instead of oil company stocks. Put and call options trade against both XLE and XOP for trading short-term trends in the energy sector.
Investing in individual stock sectors can be volatile, and your investment is subject to losses. Do your own research before making any investments.
