The energy industry practically and figuratively drives the world economy. As nations reopen their economies and shift usage to carbon-free energy sources, the rising oil and natural gas prices make this a fantastic moment to look more closely at energy stocks.
Investing in a particular industry might help you diversify and expand your portfolio. Nonetheless, each sector has its own specific set of advantages and disadvantages. Today, we’ll look at the benefits and risks of investing in the energy sector.
What Are Energy Stocks?
Energy sector stocks come from enterprises that produce and supply energy goods to the rest of the economy. It also includes companies that offer tools and services to energy producers.
The following are some of the top categories for energy stocks:
- Natural gas and oil stocks: These businesses locate new sources of oil and gas stocks, extract and refine the resources, and supply the economy with them. They are worth more due to their undeveloped oil and gas reserves than their current sales.
- Pipelines and refining stocks: Oil and gas are not yet ready for usage after being extracted. Refineries transform essential resources like crude oil into fuel suitable for human consumption. Companies that operate pipelines move processed goods, natural gas, and oil.
- Mining stocks: Coal must still be mined as a vital energy source. The same holds for the uranium used to power nuclear power facilities.
- Renewable energy stocks: These businesses concentrate on renewable energy sources like solar, wind, and geothermal.
Businesses are not restricted to a single category. In reality, it’s typical for companies to be involved in various energy-related industries. For instance, a business might manage oil extraction, refinement, and transportation and invest in renewable energy ventures.
Benefits of Investing in Energy Stocks
Huge Markets Essential for the Global Economy
The energy sector holds a significant portion of the economy and generates trillions of dollars annually. The requirement for electricity in the global economy has resulted in a steady, long-term demand for the energy sector.
Possibility for Substantial Dividends or Business Expansion
Energy corporations can benefit from rising energy prices by making much more money per barrel of oil while maintaining roughly the exact costs. They have the opportunity to invest for future growth or to increase dividend payments to shareholders.
Increase in Global Demand
China and India, for example, will need more energy as they develop further. It indicates that there will be a substantial demand in the future for both traditional energy sources like oil and gas and expanding need for non-conventional sources.
A Diverse Range of Investments
Even though they account for most energy companies by market cap, oil and natural gas stocks don’t cover the entire industry. By making a diversified energy investment, you can gain exposure to green equities like solar or wind energy companies.
Resurgence After a Recession
Because of decreased travel and general demand during the Covid-19 outbreak, the energy sector suffered. There may be a new travel boom now that the world is starting to reopen, driving up demand and prices for the finest energy stocks.
Risks of Investing in Energy Stocks
Major Environmental Concerns
Companies in the oil, gas, and coal industries are infamous for their greenhouse gas-emitting goods, exacerbating global warming. Also, they could have additional environmental problems, such as oil spills. It raises ethical issues and leaves energy corporations open to pricey legal actions that could reduce their profits.
A Volatile Market
Depending on the condition of the global economy, energy prices might change drastically and quickly. For instance, from going above $110 per barrel within the last ten years, the cost of crude oil dropped to less than $20 per barrel at the start of the pandemic. Energy stocks tend to have values that follow energy prices, making them potentially riskier investments than other sectors.
Large Investments for Companies
It costs a lot of money to investigate new energy sources, such as drilling for new oil wells and to conduct research and development on sustainable energy technologies that may or may not succeed. If enough of these expenses accumulate, your long-term profits may suffer.
Additional Regulatory Risk
Global leaders may impose new rules restricting the use and production of specific energy sources, such as fossil fuels, as the globe intensifies its fight against global warming. On the other hand, green businesses frequently rely on government development subsidies, which don’t always materialize, posing political dangers to both sides of the energy industry.
Innovation and Technology Could Reduce Long-term Demand
Over the past ten years, new green energy sources like solar have substantially decreased prices. The demand for coal is declining, and it may soon start to negatively impact the demand for oil, gas, and other conventional energy sources, endangering their long-term worth.
Buying Energy Stocks
Through a taxable brokerage account or a tax-advantaged retirement account, such as an individual retirement account, you can purchase energy stocks (IRA).
After thoroughly researching the energy industry, you can use your favorite brokerage platform to buy specific companies’ stocks. Please bear in mind that picking individual stocks is a dangerous proposition, especially in the energy industry; if you look at the range of returns among the firms, you can see that some have performed significantly better than others.
Because of this, experts advise you to invest using a diversified strategy. Rather than investing in just a few stocks, they believe you should pick tens, hundreds, or even thousands. By doing this, you can profit from the successes of numerous businesses while avoiding falling victim to the traps of a select few. This is meant to give you steadily increasing returns over time. Also, make sure that your energy company is bankable to finance your investment.
If that sounds like a hassle, investing in exchange-traded and index funds for the energy sector can simplify matters (ETFs). You can locate this by utilizing the fund screeners at your brokerage. Consider those that follow important energy sector indices, such as the S&P 500 Energy.
Bottom Line
While it presents a chance for profit, the energy sector also entails a unique set of dangers. The ideal investment strategy will depend on your portfolio and investment objectives. Before you consider securing a small business loan for your small energy company investment, examine your available trading platforms to determine which brokerage account best suits your requirements.
