How to Invest in Oil with Little Money

Investing in oil can be profitable, especially if you’re buying when oil prices are low and poised for growth. However, many potential investors assume that investing in commodities like oil requires substantial capital. The truth is, you can start investing in oil with little money by using strategies and platforms that cater to smaller investors. In this article, we’ll explore how to invest in oil with little money, providing you with various options, pros, and cons of each method, and tips to get started.

Why Invest in Oil?

Oil remains one of the world’s most important commodities, powering industries, transportation, and economies globally. While renewable energy is on the rise, oil continues to be a key energy source, and its price fluctuations present opportunities for investors. The oil market can be volatile, but for those willing to invest, it offers the potential for significant returns.

How to Invest in Oil with Little Money

1. Exchange-Traded Funds (ETFs)

ETFs are one of the easiest and most cost-effective ways on how to invest in oil with little money. An oil ETF is a fund that tracks the price of oil or a basket of oil-related companies, allowing investors to gain exposure to the oil market without buying physical oil.

Popular Oil ETFs:

• United States Oil Fund (USO): This ETF tracks the price of West Texas Intermediate (WTI) crude oil and is one of the most popular ways to invest in oil without purchasing physical barrels.
• Energy Select Sector SPDR Fund (XLE): While not directly tied to the price of oil, this ETF tracks the performance of energy companies that produce and distribute oil and gas.

Benefits of Oil ETFs:

• Low Barrier to Entry: You can start investing with as little as the cost of a single share, which could be as low as $10 or $20.
• Liquidity: ETFs are traded like stocks, meaning you can buy and sell them easily on major exchanges.
• Diversification: Investing in an ETF allows you to gain exposure to multiple oil-related companies or assets without needing to manage them individually.

Drawbacks:

• Management Fees: ETFs come with management fees, which, though typically low, can eat into returns over time.
• Tracking Errors: Some ETFs might not perfectly track the price of oil or the performance of oil companies.

2. Oil and Gas Stocks

Another affordable way on how to invest in oil with little money is by purchasing shares in oil companies. This could range from large multinational corporations like ExxonMobil (XOM) and Chevron (CVX) to smaller, more speculative oil exploration firms.

Benefits of Oil Stocks:

• Affordability: You can buy a single share in many oil companies for under $50, making it accessible to small investors.
• Dividends: Many established oil companies offer dividends, providing you with a steady stream of income in addition to any capital gains.
• Potential for Growth: If the price of oil rises, oil companies tend to benefit, resulting in stock price increases.

Drawbacks:

• Volatility: Oil prices are volatile, and companies involved in oil production can experience significant swings in their stock prices based on geopolitical events or changes in demand.
• Company-Specific Risk: Unlike investing in ETFs, buying individual stocks exposes you to risks related to a single company’s performance.

3. Fractional Shares

Some online brokers, like Robinhood, Fidelity, and Charles Schwab, offer fractional shares. This allows you to buy a portion of a stock rather than needing to purchase an entire share. If you want to know how to invest in oil with little money and get the shares of oil companies like Royal Dutch Shell (RDS.A) or BP (BP), but don’t have the budget to buy a full share, fractional investing makes it possible.

Benefits of Fractional Shares:

• Affordability: You can start investing with as little as $1.
• Access to Expensive Stocks: Fractional shares allow you to invest in high-priced stocks without needing the full amount to purchase a share.

Drawbacks:

• Limited Availability: Not all brokers offer fractional shares for all stocks or ETFs.
• Small Gains: Since you’re investing with small amounts, the potential returns may also be small, especially if the price movements are minimal.

4. Commodities-Based Mutual Funds

Some mutual funds focus on commodities like oil, offering a diversified approach to investing in the oil sector. These funds might invest in a combination of oil stocks, ETFs, and futures contracts. Some investors call mutual funds the best option for people who are looking into how to invest in oil with little money.

Benefits of Commodities-Based Mutual Funds:

• Professional Management: The fund is managed by professionals who make investment decisions based on market trends and economic factors.
• Diversification: You get a wide exposure to the oil industry through a single investment.

Drawbacks:

• Higher Minimums: Many mutual funds require a higher minimum investment, typically starting at $1,000 or more.
• Fees: Mutual funds tend to have higher management fees than ETFs, which can impact long-term returns.

5. Oil Futures and Options

While futures and options contracts are typically reserved for more experienced investors, there are ways to get involved with small amounts of money. Oil futures allow you to speculate on the future price of oil, while options provide the right, but not the obligation, to buy or sell oil at a specified price.

Benefits of Oil Futures and Options:

• High Potential Returns: Futures and options offer the potential for significant returns if you correctly predict oil price movements.
• Leverage: These contracts allow you to control large amounts of oil with a relatively small investment.

Drawbacks:

• High Risk: Futures and options are much riskier than stocks or ETFs. If the market moves against you, you could lose more than your initial investment.
• Complexity: These instruments are complex and often require a deeper understanding of market dynamics.

6. Oil Royalty Trusts

Oil royalty trusts own the rights to oil wells and collect royalties from the production of oil. As an investor, you can buy shares in these trusts, and they will pay you a portion of the income generated from oil production.

Benefits of Oil Royalty Trusts:

• Income Potential: Royalty trusts often pay high dividends, offering a steady income stream as long as oil production remains profitable.
• Low Initial Investment: You can buy shares in royalty trusts at relatively low prices.

Drawbacks:

• Declining Production: As oil wells dry up, royalty payments can decrease, leading to lower returns.
• Dependence on Oil Prices: The performance of oil royalty trusts is highly dependent on the price of oil, making them more volatile than other oil-related investments.

How to Invest in Oil with Little Money: Tips

1. Start Small

If you’re new to investing in oil, start with a small investment to limit risk. You can gradually increase your exposure as you become more comfortable with how the oil market works.

2. Diversify Your Portfolio

Don’t put all your money into oil investments. Ensure your portfolio includes other asset classes like stocks, bonds, or real estate to reduce risk and volatility.

3. Use a Low-Cost Brokerage

Many online brokers now offer commission-free trades, which can save you money when buying and selling oil ETFs, stocks, or fractional shares. Look for a broker that offers affordable investment options without excessive fees.

4. Stay Informed

Keep an eye on global events, oil production reports, and market trends that affect oil prices. Being informed about the oil market can help you make more strategic investment decisions.

Conclusion

Investing in oil with low budget is not only possible but can also be a smart way to diversify your portfolio and take advantage of price movements in the energy sector. Whether you opt for ETFs, oil stocks, fractional shares, or royalty trusts, there are several low-cost options to get started. Always remember to start small, stay informed, and diversify your investments to reduce risk while potentially capitalizing on opportunities in the oil market. If you have more questions on how to invest in oil with little money, please let us know in the comments.