Opportunities for Investors to Make Money From Low Oil Prices
How to Make Money As Oil Prices Rise
On any given day in the market, the actions of investors in oil shows the current opinion on the state of oil. Investors make billions of dollars on these opinions. The Crude Oil WTI futures are the prices of crude oil quoted in the United States to the West Texas Intermediate (WTI). They are the most actively traded commodity contracts on the market. Even though the price of oil has dropped 60% in recent months, the interest in crude oil has increased. There are a lot of investment plans to choose from. Investors must understand the characteristics of each option before they begin to trade in the market.
Starting Your Investment
Do research.No matter what you’re investing in, you need to make sure you go into the decision as well informed as possible. Reading an investment’s prospectus is a good start, but your research should not end there. You need to research an investment before you buy in. You need to look at the historical returns on an investment. You also need to understand the terms of the investment and analyze its future potential. While no one can know for sure how any given investment will go in the future, you can make a better guess by being well informed .
Make a preliminary investment.If you aren't necessarily ready to risk a lot of money on oil just yet, you can choose a safe investment instead. You could choose to invest indirectly in oil. You can buy the stock of a company that explores, extracts, or makes oil and oil based products. Some of these companies may pay a dividend. Keep in mind that their fate relies on the price of oil. Their business model is built around them making money off the oil as well.
- The more certain you are about the direction of the prices and magnitude of your possible investment, the greater the risk you should take. The rewards can be large. People can make and lose a lot of money in a single day. If you are looking to make a little money without much risk, this is a way to profit without risking it all.
Choosing an Investment
Open a brokerage account.The first step in the process is to find a brokerage that offers option trading. You also need to look at their account minimums. There are websites that compare many brokerage firms for you, such as Top Ten Reviews. Once you’ve selected a brokerage, open an account. You then need to apply for the right to trade options. They will ask questions about your investment history, total amount available to invest, and how much you can lose. You need to tell the broker that you have ability to take large losses and know about the product so you can get permission to trade options.
Choose a direct investment instead.Once you are ready to move beyond an indirect investment, you can choose to directly invest instead. A direct investment in oil involved buying a contract in the current or future market. The spot price is the cost to buy oil at a particular moment in time. A futures contract gives you the right to buy oil at a preset price on a predetermined date in the future. For most people, buying these contracts is not realistic. It requires you to put down a lot of money up front. You also have to put up collateral and actually buy the oil. Corporations, investment managers, and hedge funds tend to do this more than individual people.
- Businesses are able to effectively use this market to create have stable money for their operational expenses.
- For example, an airline company can buy futures contracts today to buy the oil it needs two years into the future. This locks in their cost at the price that is listed the day they buy the contract. It removes the risk of rising oil prices cutting into their future profit.
Choose low risk investments.For individual investors, there are simpler and more cost-effective ways to buy into oil. One of them is to buy option contracts on the oil index. This is similar to buying a futures contract. You purchase the right to buy oil at a specific price on a preset date in the future. You would not use the oil yourself or receive the product. You buy it in order to sell it to other companies at a higher price than the contract price at which you bought it. Any individual can trade options, as long as they qualify.
Start trading.Once you are approved and have put money into your account, trading options is as easy as trading a stock. Login to your account. Search for the oil index on the exchange-traded funds (ETF) by using its ticker. Once you have it up, click on the link that says “option chain”. You will see a number of dates going into the future. By clicking on the future expiration date of the option you want to purchase, you will see the prices of the contracts available. If you are very, very certain that the price of oil will go up, and the date that it will do so, this is a great investment.
- You can make the purchase with very little money up front. There is also no cap on how much you can make.
- There is a downside. If oil does not go above the preset buying price on your contract before the date on the contract, you lose all your investment.
Buy a contract.You buy contracts at a small rate at first. This gives you the right to buy oil at a lower price in the future. You can then sell it at the higher going rate on the date of your contract. For example, oil is trading for . You believe it will trade at 0 by the end of June. After looking at the available option contracts, you see that you can buy the right to get oil at for the cost of per contract. This means is that you will pay another investor per contract today.
- In return, you get the right to purchase oil at before the end of June. If oil hits your price target by this time, you will be able to buy oil at . At the same time, you get to sell the oil at 0 a unit. You make a profit per contract. This is a 500% gain above your initial cost of per contract.
- The downside is that you lose all of your invested money if oil does not rise to at least 0 in the amount of time on your contract.
Buy the index.If you cannot handle that kind of possible risk, you can buy the index instead. You buy the whole index at a particular prince instead of buying contracts that expire. The process is simple. Login to you your brokerage account. Search for the particular oil ETF that you would like to purchase by using its ticker symbol. Once you have found it, click on the “trade” link. There, you can enter your order to buy the ETF.
- The upside is that you can buy it for the cost of a brokerage trade. You can also sell it at anytime you’d want. If the price of oil goes up, you make money on your investment.
- The downside is that oil does not provide any other way to profit. If the price of oil that you bought in at does not go up, you have dead money. You will have lost the option to invest in another vehicle that may have paid interest during this period of time. This is referred to asopportunity cost.
Buy equity in an oil company.In order to avoid this, you can buy the equity of an oil exploring, extracting, or producing company. These companies can be problematic. They rely not only on the oil market but of the business itself. There are monetary risks linked to both. Their ability to make you money relies on the price of oil. The process of buying an oil company is no different than purchasing the index ETF. Login to your brokerage account. Search for the stock of the company you want to buy into by using its ticker symbol. When you’ve located it, click on the “trade” link and enter your order.
QuestionWhat are some oil ETF?Top AnswererVanguard, for example, has an Energy ETF that invests entirely in oil- and gas-related enterprises. Most large mutual fund companies have something similar, which you can buy directly from them or through any brokerage.Thanks!
Video: How Can You Make Money on Oil These Days?
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