7 Things To Consider Before Making An Investment In Energy Stocks

You must be aware that the energy sector, including crude oil and natural gas, is closely intertwined with the global economy. Yet, the energy dynamics are ever-changing. From the prices to the utilization in production as energy sources, everything contributes to their value.

The energy sector has evolved for the better in the past years. While traditional oil and gas companies were the top players previously, renewable and clean-energy alternatives have made their way into the market. Wind, solar, and fuel cell technologies are becoming mainstream energy sources.

While people have always found energy stocks quite risky, now they are looking to invest in energy. The clean energy sub-sector has become one of the key players in the energy stock industry.

What are Energy Stocks?

Energy stocks are just like stocks of any other company. It just refers to investing in companies in the energy sector. It could range from traditional energies like gas and oil, utility, or power plants to renewable and clean energy generation companies like wind, solar, fuel cell, etc.

In simple words, you may call an energy company “a company whose core product is based on fuel or electricity.”

Are you thinking of investing in energy stocks?

Let us tell you the different categories and things to consider before investing in energy stocks.

Energy Stock Categories

While energy stocks essentially relate to energy companies, they are classified into different categories based on the energy source. Some of the top energy stock categories include:

Oil and Natural Gas

Oil and natural gas companies are old yet major players in the energy business. They enhance their business by looking for new oil and natural gas reserves to increase revenue. Oil and natural gas are considered good choices for energy stock investment as they contribute majorly to the global economy. The addition of more (untapped) energy reserves increases their value.

Refining Stocks

The other kind of energy investment companies includes pipelines and refineries. While oil and gas companies make money by finding new sources of crude oil, refining companies process them to make them suitable for consumption. The pipeline companies help refineries transport the processed products like refined oil and gas per need.

Mining Stock

While you do not hear of coal much now, it is a key energy source and an important factor in energy production. You may invest in mining companies working on mining coal or uranium for energy purposes.

Renewable Energy Stock

Renewable energy storage systems stocks are becoming prominent in the stock market. They comprise companies that work on green energy sources like wind, solar and geothermal.

7 Things to Consider Before Making an Investment in Energy Stocks

Economic Conditions

As mentioned, energy and the global economy are intensively related. Energy is a critical commodity, and the need for energy never dies. Still, it may face a low demand during poor political and economic conditions. The lesser demand for energy leads to lower supply and reduced costs. To keep supply steady in a region of the financial crisis, the companies may need to reduce the cost of oil or petrol.

Thus, you must consider the global and regional economic conditions when investing in energy stocks. It is better not to invest in them during economic uncertainties.

Monitor Supply

Despite the entrance of renewable energy sources into the market, crude oil and natural gas are the ruling players in the energy stocks. The demand and supply of renewable energy also significantly depend on the demand and supply of traditional energy sources.

Let’s say that several energy companies offer their products and services in a particular part of the world. When people have more options, the companies will compete with each other. It will lead to higher prices. On the other hand, if the supply is low and people do not have many options, they might be willing to buy at higher prices.

Many consumers resort to renewable energy sources when oil and natural gas are unavailable. It allows you to follow the energy supply and how it will impact the energy stocks you invest in.

Oil Prices

You might see this point and wonder, “But, I am not investing in oil or natural gas companies.”

Yet, as we already mentioned, oil prices and supply affect all kinds of energy stocks. It is one of the most important things to consider before investing in stocks. Keep track of the oil prices when you wish to invest in energy. Ethan Bellamy, managing director of Baird, says, “Investors should always guard against oil price volatility. Oil has long, medium, and short cycles, and the largest producers are in a cartel that is slowly slipping from power as U.S. production grows.”

Energy-exchange Traded Funds

Investing in a single stock is always a higher risk than opting for a diversified investment portfolio. Exchange-traded funds (ETFs) are a fusion of conventional stocks and mutual fund characteristics. They let you become a part of the energy stocks market without having to put all your eggs in one basket.

Consider Blue-Chip Companies

Blue-chip companies are well-established, nationally recognized, and financially stable. They are known for their high-quality products and services. They are also good at making profits in poor economic conditions. Investing in such companies gives you high returns over longer periods with reduced volatility. They are typically less risky. Finding a blue-chip company that offers your expected returns over a specific period is always safe yet a little difficult.

Renewable Energy

You might not see a common application of renewable energy today. Yet, it is the future of energy globally, depending on the circumstances. Renewable energy will continue growing as a part of America’s energy mix. Renewable energy sources are green and will be cheap for the next decades. However, it is somehow difficult to find less-volatile publicly-traded renewable energy stocks.

Learn Every Day

The stock market is not a one-day training. It requires a long time to understand the intricacies of the energy stocks and companies to invest in. It is a good idea to follow some local and globally acclaimed energy investment gurus that may guide you further regarding things to consider before investing in energy stocks.

The Bottom Line

Energy and global finances are interlinked significantly. They both depend on each other. Fluctuations in oil and gas prices affect the economy, and economic uncertainty affects the price and supply of energy sources. Make sure to monitor the supply and oil prices before you invest in energy stocks. Investing in energy stocks is a good decision if you have researched properly. You may consider blue-chip companies and renewable energy if it suits your investment model. Experts also suggest opting for Exchange-traded funds (ETFs) for reduced risk.