Wouldn’t it be nice to have a gas pump in your own front yard? You’d make a fortune. Since that’s not feasible for most folks, though, you’ll have to settle for oil price investing.
Don’t worry. It doesn’t feel like settling once you learn the ropes. In fact, you can generate huge profits from oil investing. I know I have.
But what do you need to know about oil price investing before you get started? You probably have questions about the oil industry, what types of investments exist, and more. Let’s jump into those questions now so you’re more informed about your trading career.
1. Understand That What’s Good for Consumers Isn’t Always Good for Investors
There’s somewhat of an imbalance when it comes to oil price investing. As a consumer, you’re rooting for gas prices to come down. Nobody wants to pay $3 per gallon at the pump. During oil investing, though, you’re often rooting for gas prices to climb.
That’s why you have to separate your interests as a consumer from those as an investor. Otherwise, you’ll make emotional trades instead of logical ones, which can lead to huge losses in the stock market.
Of course, if you know that oil prices are going to go down — and your consumer side rejoices — you can always short stocks and make money off their decline. But that’s a conversation for a different post.
The important thing to remember is that you have to make decisions based on data. Oil price investing involves many factors, from gasoline prices and fleet management to foreign relations and environmental concerns. If you’re unable to detach yourself from your personal feelings on those subjects, you might struggle with oil investing.
2. You Might Consider Starting With the Big Companies
Many people start their investment careers with an extremely low-risk tolerance. They don’t want to make any oil price investing decisions that seem even remotely shaky. That’s where the big companies come in, such as Exxon, BP, and Halliburton, which are relatively stable stocks.
However, keep in mind that they’re also expensive. Oil investing doesn’t demand a huge trading account, but if you want to buy 100 shares of BP at $43 per share, you’ll have to come up with $4,300 to invest.
On the other hand, if you invest in a smaller company that trades at $10 per share, you can buy 430 shares with the same money. We’ll discuss volume more in detail later, but remember that there’s a balancing act required for oil price investing.
3. You Should Steer Clear of Futures Until You Have Some Experience
Futures contracts often look enticing to new oil price investors. Steer clear until you have a little more experience because you can encounter huge losses when investing in futures. Options trading is a little different because your losses are capped, but I would stick to buying and selling stocks until you have more experience with oil price investing.
4. You Can Benefit From Both Sides of a Trade
Much of the risk in oil price investing involves choosing a side. In other words, you have to decide whether a stock price will move up or down over a given time period, then buy and sell shares in that stock accordingly.
If you’re wrong, you lose money. If you’re right, you gain money.
However, there are ways to benefit from both sides of a trade. No matter which direction the stock moves, you make money.
That’s one of the most important secrets I share in my Energy Inner Circle publication, which focuses primarily on oil investing. The only time you don’t profit is when the price stays the same.
5. Volatility Matters
This brings me to my next point. Volatility is extremely important when it comes to oil price investing. If a stock moves by just a small margin over time, it doesn’t offer much opportunity for profit.
It’s easy to see why when you consider simple math.
Let’s say that you have $4,000. You use that money to buy 400 collectibles at your local flea market for $10 each. You then turn around and attempt to sell those collectibles on eBay.
Your profit depends on the spread — the difference between what you paid for the products and what people will pay for them on a different market.
You bought the collectibles for $10 each. If consumers on eBay are willing to pay $11 for them, you’ll profit $400, putting $4,400 in your pocket.
But what if consumers on eBay are willing to pay $100 each? The game changes. Now you profit $36,000 ($40,000 minus your initial investment of $4,000).
See why volatility matters?
In the stock market, you want to buy at $20 and sell at $200. That’s much better than selling at $22.50 because your profit increases exponentially.
6. Volume Does, Too
If you want to succeed in oil price investing, you also have to consider volume. While volatility describes the price action of a given stock, volume describes how many shares of a given stock have been traded over a specific time period, such as a single day.
Lots of volume indicates lots of investor interest. It creates an environment that could drastically change the stock’s volatility.
Let’s go back to our eBay example. Maybe the volatility is there. Consumers are willing to pay $100 for the collectibles you bought for $10. However, you have 40 collectibles and there are only enough buyers to take five off your hands.
That’s not a good situation. You’ve pocketed $500, but you invested $4,000, so you haven’t profited at all.
It’s not a direct analogy, but it’s similar to volume in oil price investing. If you buy 50 shares of a given stock and decide to sell the next day, you need enough buyers to take those 50 shares off your hands. Low volume often results in few buyers (or sellers if you’re shorting or want to buy in to a specific stock).
7. Smaller Companies Sometimes Make the Best Bet
I mentioned above that you can start with larger companies that carry smaller risks. That doesn’t mean there’s no risk, but you’re less likely to lose a ton of money.
However, I’m constantly trading shares on smaller companies. Oil price investing isn’t just about the big household names. Some of the smaller, lesser-known businesses can experience more volatility because of their low stock prices and other factors.
8. Other Energy Sources Impact Oil Stocks
If you’re interested in oil price investing, don’t neglect to research other energy sources. For instance, solar and hydropower both provide energy, so they’re “competitors” for oil. Consequently, fundamental factors in those sectors can influence oil stocks.
Additionally, you can branch out from oil price investing to invest in solar energy, hydroelectric energy, and other stocks. When you diversify your portfolio, you create more balance and gain more opportunities to profit.
9. Oil Price Investing Isn’t Limited to Oil Companies
When it comes to oil price investing, many new investors just think about oil companies. For instance, they research the stock prices of companies that dig for oil, process oil, refine oil, and sell oil. But those aren’t your only opportunities.
For instance, what do countertops, cooking utensils, ceiling tiles, and car dashboards all have in common? They can all be manufactured using oil.
You can see now how oil investing can be impacted by many other industries.
10. Knowledge Is Power
Now that I’ve helped you better understand what oil investing is all about, I have one last tip. The more knowledge you gain, the better your chances of profiting become.
If you don’t know that a company has just announced that another business is taking it over, you could lose tons of money by investing in its stock. Similarly, if you’re not familiar with how stock charts work, you can’t read them to better understand price movement.
If you’re interested in oil price investing, you need Energy Advantage. It’s my newsletter based on helping people take advantage of oil investing through smart, profitable stock picks. As I said, knowledge is power, and I help new and experienced investors create diverse portfolios that allow them to profit from oil stocks no matter which way they swing.
I’d love for you to join my newsletter and profit from those tips, as well. Then drop me a note and let me know how you do. I love hearing from my subscribers when they reap huge profits through oil price investing.