How to Invest in Oil Commodities
Investing in a commodity is a good way to diversify your portfolio in other ways than the traditional stocks and bonds. Commodities are goods which have a demand, but are priced the same no matter who is producing it. These goods are usually limited to things like food products, paper and natural resources like oil. Investing in an oil commodity can be done in several different ways, all which have their own pros and cons.
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Instructions
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Contact your broker and let him know you would like to invest in oil. If he has experience in this type of investment, use him to broker the deals for you. If not, ask him to refer you to someone who has knowledge in commodity trading.
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Research the futures markets to determine if this is the kind of security you would like to own. A futures contract is basically an agreement that allows you to buy and sell a quantity of the commodity for a price sometime in the future. These markets can allow you to make a huge profit for the investment if you invest wisely, but they can be very volatile and be influenced by world events.
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Investigate oil companies to determine if buying stocks is a better way to go than the futures markets. All major oil companies are publicly traded and you can buy their stocks through your normal brokerage account (your usually broker can most likely help you with these as well). Stocks are good because they are very liquid and there is usually a great deal of information about them. However, the stock price is not only controlled by the price of oil, but also by company factors, which means you aren't getting a true oil investment
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Determine if you want to invest in ETF rather than futures or stocks. An ETF (exchange traded fund) is a fund that is traded like a stock, but allows investors to take advantage of futures market prices. These are an easy way to get into the futures market while minimizing your overall risk, especially if you are not a huge investor.
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Tips & Warnings
There are also mutual funds which may have oil stocks in them and managed futures, which operate like a mutual fund, but in the futures markets. Both of these allow you to get your foot into the oil commodity business, although they may not be solely oil. Talk to your broker about what is right for you.
