How Do You Invest in Oil?

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There are several ways, but let’s start with why you would want to invest in oil.

You buy oil-related assets when you think oil prices will rise. Oil prices tend to rise when global economic demand at large rises and supply remains constant or doesn’t grow hugely. Oil is used for so many things, so when people and businesses ramp up activity, oil demand rises.

When that happens, oil companies see a stronger outlook on revenue and cash flow and their credit probably strengthens. And being on the right side of an oil commodity contract is a winner too.

Let’s start with buying equity in an oil company, or an oil stock.

Oil prices are looking to rise. An oil company trades at a reasonable valuation. Costs and expenditures shouldn’t rise excessively, so you’d likely have rising profits. This would be a strong case for buying oil stocks.

Oil stocks also currently pay high yielding dividends because their share prices have been pressured (see our explainer on how dividends work), as the need for oil has diminished in recent years. So if you see a descent outlook for oil stock prices, maybe buy a few oil stocks for those dividends.

What about oil bonds?

If you don’t want the volatility of oil stock prices — which is ever present — then buy the bonds. Bonds are less volatile than stocks, but because of worsening credit in some oil names, the bonds pay high interest rates. If you’re a long-term investor, maybe you don’t care about the slight volatility in the high yield oil bonds and you’re happy to passively take in the interest income.

Then there are oil commodity contracts. 

To see how commodities work, watch the quick video above. 

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