There are many ways to invest in the oil industry, one way is to buy oil and drilling company stocks. Another way to invest in oil is by putting your money in oil futures.
It’s a risky business as the futures market is highly volatile, but you also stand to gain significantly over a short period of time.
Oil futures are basically derivative securities which enable the holder to have the right to purchase oil at a specified price. It’s quite similar to the workings of stock options.
If you exercise this future by the date of settlement, you can purchase the oil at the price stated in the futures contract.
So if you think that oil prices are going to increase, you can hold on to your futures while it rises in value. Then you can sell it later on to an investor who wants to exercise it.
They can make good investments as there’s a possibility to make substantial gains. But the price of oil can change rapidly, so if you don’t know what you’re doing, you can stand to incur significant losses.
This type of investment is highly liquid meaning that it’s the most actively traded future on the market today. As a result, most active equals most liquid.
You can leverage your oil futures purchase on margin (the margin requirements are set by exchanges). Although this can be a good option, it can also be a dangerous one.
The fact that there’s only a finite supply of this natural resource is a huge advantage for investors. Other commodities like livestock and corn can have their prices stabilized. But the same can’t be said for oil when we start running out of it.
As said before, the biggest disadvantage of investing in this commodity is the fact that the futures markets are highly volatile. It’s almost impossible to predict its movement to a degree of certainty. So you have to be thorough to make the best investment decisions to even have a chance of getting it right.
The price of oil is also affected external factors other than supply and demand. This is a disadvantage as it makes it highly unpredictable. For example, the price of oil can be affected by political instability in an oil producing nation.
As a result, investors need to take all these variables into consideration when they speculate on the movement of the price of oil.