You may have heard that oil is a non-renewable resource and you already know how much the global economy depends on it. So you may think that the price of oil will always be on the rise. In this article, we’ll go over the pros and cons of buying oil futures and explain why it’s riskier than it may seem but also why it could be a great investment. When you buy oil futures, you’re betting money that you know how the price of oil will change in the future. You may want to consider working with a financial advisor to determine whether this is a good option for your portfolio.
How Oil Futures Work
When you invest in oil futures, you’re not actually investing in the oil itself. This means you don’t have to store barrels of crude oil in your garage. Instead, you’re investing in a futures contract and betting on the price of oil. There are other forms of oil-related investments, like buying shares in oil companies or oil ETFs.
But let’s focus on oil futures. When you buy oil futures, you’re taking a position on the movement of oil prices. This could be a long position (you’re betting that oil prices will rise) or a short position (you’re betting that oil prices will fall).
Let’s say you decide to take a long position on oil prices. You buy a stake in an oil futures contract on the New York Mercantile Exchange (NYMEX) through a broker, paying a certain price per barrel of crude oil for 1,000 barrels. Later, you learn that the price per barrel has risen, so you decide to exit your position by selling your side of the futures contract.
You just made a profit in that example, once you subtract your initial investment and the fees you paid. But if oil prices had dropped, you would have lost money. It’s also possible to buy futures on margin, meaning that you only have to put up a fraction of what your stake is worth. This means you stand to make bigger gains, but it can also lead to bigger losses. It’s a good idea to approach this strategy with caution as it’s not like investing in a safer vehicle like bonds.
How to Buy Oil Futures
It’s easy to read news about movements in oil prices. You hear on the news when prices rise and fall, but to succeed as an investor in oil prices, it’s not enough to react to that news. You have to find a way to anticipate the changes.
You may read that prices have risen and decide to take a long position, assuming that that trend will continue. But if there’s one thing to remember about investing, it’s that past performance is not a guarantee of future returns. In other words, you can’t know that oil prices will continue to rise. In fact, oil prices are quite volatile. That means you stand to lose the money you invest.
If you still want to try your hand at trading oil futures, you’ll need to go through a brokerage firm, and not all firms give the option of investing in commodity futures. When you find a brokerage firm online that lets you trade futures, it’s important to check its credentials against SEC and FINRA records.
The Bottom Line
The average investor doesn’t need to dabble in oil futures – or any kind of commodity futures trading for that matter. We’re all busy with jobs, friends and hobbies. There’s no need to take time out of your packed schedule to research oil prices and try to get rich by speculating on oil futures (unless you want to and have the money to lose, of course). The average investor will likely be better off looking for less risky, low-fee investing options that you can “set and forget.”
Tips for Investing
- Before investing in anything remotely risky you may want to first run your plan by a professional. Financial advisors can help you create an investment plan and help you understand what investments will lead you toward your long-term financial goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- You may want to also run any potential investments through an investment and return calculator to help you understand your potential with the asset.
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