How to Invest Successfully in Oil and Gas Futures. P. 3. Investment Channels

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Now that you have a better grasp of price aspects and various factors that influence prices of oil and natural gas, the next thing to consider is what investment channels you are going to choose in order to consistently gain the highest return on your investment. Considering how vulnerable these prices are to the changing global political landscape, it is vital to find and use tools that can help you protect your investments from these factors as much as possible.

Spot trading

Spot trading may well be the simplest method of investing in oil and gas.  Spot trading simply means that a commodity is transacted immediately, as opposed to some point in the future. These markets are typically web accessible, and you can use your computer to log in and make your trade.  This type of trading is a simple procedure, similar to online trading of forex or stocks.

Equity holdings

A second method of trading oil and gas that you might consider involves oil and gas stocks. This has a direct impact on the price trends of oil and gas.  These are also closely related to price trends of the commodities in the more general commodity market.

Quite frequently you will notice that the prices of oil and gas stocks will reflect price trends of the parent commodity in the general market. You may also notice that these commodities are the first to respond to international political tensions and policy actions taken by world governments. In this manner, it becomes something like a direct play on the initial commodity.

Mutual funds

If you would like to capitalize on the overall energy price fluctuations while still limiting the amount of risk that comes from entering the energy sector, the easiest way to accomplish this goal is through Mutual Funds. This can help you not only invest in oil and gas stocks, but also set your mind at ease and reduce the odds that you will incur substantial losses from the innate nature of mutual fund investing, as well as the dynamics of this industry.

Exchange traded funds

Exchange traded funds (ETF) are a commonly used method of investing in the energy sector. The value of ETFs like in oil and gas futures, instead of stocks, which obtain their value from oil and gas. What results from this is that even tiny changes in rates influence the prices. It also means that you can get in or out of the market any time you like. Finally, ETFs can be used to diversify your portfolio, so you get the highest possible returns on your money.

One of the primary advantages of using exchange traded funds to invest in oil and gas is that there is no lock in period. Trades can be made just the same and in any open equity market. However, the underlying value means your overall risk is lower and your exposure in the energy sector is significantly shielded from the whims of the erratic swings often seen in the prices of oil and gas, as well as the influence of unpredictable political landscape around the world.

Unit investment trusts

A final method of trading oil and gas is through unit investment trusts (UIT). In UITs, an entire trust is divided into smaller units. These units are separately priced and sold as exclusive pieces.

Each of the units has a predetermined and undivided value which is assigned to the commodity to which the UIT is linked. Each UIT is associated with a specific amount of oil and gas holding, and it is based on these holdings that the UIT pieces distribute the value.

Each UIT has specified maturity date at which point all gains and losses are distributed among the holders of the UITs. These units are treated as a pass through element both in terms of income and in terms of deductions.  Deductions derived from oil and gas investments conducted using UITs also have the advantage of passing through this channel.

UITs operate in a manner similar to real estate investment trusts. This means their investments are in oil and gas assets directly. Expenses that you may see incurred are primarily the result of dealing directly in the asset, whether buying or selling.

UITs are an especially useful method of investing for those interested in investment avenues that have well-defined tax advantages. Any taxable gains do not apply until the UIT matures, and direct links to oil and gas can improve the potential for aggressive profit.

Conclusion

The prices of oil and gas can be seen both as a strong gauge of a country’s economic health and simultaneously a key factor in the country’s economic condition. Because of this, any investment in the sector, regardless of whether the investment is made in commodities or stocks, can potentially expose you to geo-political risk.

As a result, investors are increasingly seeking out new and innovative tools that can help them obtain the highest return on investment along with the lowest possible risk. Of course, any time you are investing, you should read the offer document carefully before signing.

[Photo used for the featured image: "Energy in the People’s Republic of China” by Asian Development Bank, used under CC BY-NC-ND / Image cropped]

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