Oil investment involves investing directly or indirectly in the oil and other industries that are related to it. This industry is a very volatile economic sector and as such should not be dabbled into by a newbie investor.

Due to the fact that it is a globally traded commodity, one stands the chance of getting great returns on investment.

However, bear in mind that in investment, the higher the ROI, the higher the risk will be. That is why we will give a brief rundown of the basics of this type of investment in this article.

Meanwhile, check out this article for more on the relationship between risks and ROI.

Different Ways of Investing in Oil

We mentioned at the beginning that investing in oil is a highly volatile venture and should not be attempted by newbies. Although one can easily lose money in this industry, there are diverse ways of starting out that can mitigate losses at the learning stage.

However, we will just go ahead to briefly discussed the different means of investing in this sector. At the end of this discourse, you can now decide on which investment method is safest for your level of expertise.

Futures

The principle of this method is the same as with the regular futures contract; the only difference is that the commodity involved is oil.

In this method, two parties agree on a price at which a determined quantity of the commodity will be sold at a date agreed upon. This contract can be settled by having the commodity delivered physically to the buyer on the date agreed upon and payment remitted to the seller.

On the other hand, the contract can be settled by the seller receiving the difference between the market price and the contract price from the buyer at the end of the contract (i.e., the expiration date).

Mutual or Exchange Traded Funds

In this method, people who want exposure to oil investment, pool their funds to invest in this industry.

This method is beneficial for people who want this exposure and benefit but do not have the requisite knowledge to be hands-on investors. The major thing that happens in this method is that mutual funds are usually invested in companies that operate in the industry.

These companies could be those that are in the upstream, downstream, or midstream sector of the industry. The upstream companies are involved in drilling while downstream are the refineries and the midstream deal with pipelines.

Mutual funds are most often administered by funds managers and there are many investment companies that specialize in this. If you are interested in oil mutual or Exchange-traded funds, you need to look out for reputable companies in that niche market.

You can visit Alphascend Capital’s website to get more information on this and more.

Equity

This is one of the preferred methods for veteran investors. In this method, the investor can either buy the stocks of an oil company on the stock exchange or invest in companies that fund oil exploration companies or related services.

Retail investors would most often go for stocks and PE funds while large corporations establish oil exploration or refining facilities. Note that with each method of investment, the amount invested, and the risk differs. This also means that the return on investment also differs.

Factors to Consider Before Investing in Oil

When we talk about factors to consider before investing in the oil sector, we are talking about both positive and negative factors. These range from the risks that you should be prepared for and the benefits that you should expect.

We will briefly list a few of them below:

Volatility – The oil industry is considered a highly volatile one and such investment in it can swing from great to bad in a moment. That is why every prospective investor must factor this in before engaging the market.

Fraud – Just as with every investment option or market, there are scammers and frauds in this sector too.

However, due to the high costs of these types of investments, the damage that fraud can cause is great. For this reason, no one should jump into any investment deal without due diligence. Ensure that you are dealing with a legitimate entity before proceeding.

Political landscape – Before you invest in the oil sector through any method of investment, ensure that the political landscape of the region is stable. If you make an investment in a politically unstable region, prepare to encounter massive losses due to several issues.

Tax Deductions – The IRS of the United States gives tax deductions to investors in the oil and gas sector due to the depletion of minerals and natural resources. So, this might serve as an incentive for a prospective investor to go ahead and diversify into this industry.

You can learn more about oil and gas tax preferences in this report.

Conclusion

We hope the information we have given you is enough to start you out in your research. Bear in mind, however, that you need to research further and do your due diligence before you proceed so as not to encounter huge losses in your investment endeavors.