3 Ways You Can Invest in Oil

If you want to expand your portfolio, it's time to explore oil investments. Oil investments have a history of performing well, though like any commodity, they do experience natural price fluctuations. When you are ready to add oil investments to your portfolio, here are three options to explore. 

1. Purchase Individual Oil Stocks

One way to begin investing in oil is to purchase stock in an individual oil company. When deciding which stock to purchase, take into account multiple factors, like the company's debt load, its profit over the past few years, and whether or not it issues regular dividends to its investors. Investing in an oil company with a history of paying regular dividends helps you hedge your portfolio against temporary decreases in the value of your stock. The dividends serve as a return on your investment (even though they aren't guaranteed). 

A drawback to buying an individual stock is that it is riskier than purchasing an aggregate fund, like an EFT or mutual fund. 

2. Invest in Oil Futures

An oil future is an agreement to take possession of a specific number of oil barrels at a predetermined price on a specific date. Once the date rolls around, the hope is that the listed price on your oil future contract is lower than the actual price of the oil on that specific date. If you expect oil prices to increase, oil futures are a top alternative to explore. 

Oil futures are a capital-intensive way to invest in oil itself, rather than in the stock of an oil company or other fund. On the date specified in the contract, you don't have to take physical possession of the oil barrel. Instead, you can sell the rights to the barrels, hopefully at a profit. 

3. Buy an Oil Commodity EFT (Exchange Traded Fund)

If you aren't quite sure which oil investment you want to pursue, an oil commodity EFT is an excellent alternative. An oil commodity EFT consists of multiple oil funds, including the stocks of individual oil companies and oil futures. Since you are holding funds from multiple companies and futures, this helps reduce your risk. If one oil company does poorly, the hope is that the stocks of the other oil companies will perform well, minimizing your potential losses. 

Know that dividends are less common for oil commodity EFTs than they are for individuals stocks. This doesn't mean that an EFT won't have a favorable return, but it is a detail to keep in mind as you diversify your overall portfolio.