The first thing to understand about investing in oil and gas is that it is a lot more volatile than investing in stocks. Stocks and low-yield, low -risks bonds are the most conservative way to invest. Stocks are equity investments that represents part ownership in a corporation and entitles you to proportionate part of that corporation’s earnings and assets. While Oil on the other hand is the most traded commodity in the world and has become an indicator of wealth for many countries.
Like every other investment opportunities out there, investment in oil as against investment in stocks and bonds has its pros and cons.
The stock market is one of the most conservative places to invest your money, though investing in stock can often become risky, ability to manage and mitigate against these risks, can help you take advantage of the stock market to secure your financial position and make money. Investment in the stock market as an asset class has an overall advantage for your investment portfolio.
An investment in stocks comes with a lot of benefits in the form of investment gains – the rise in the value of your stocks as a result of positive growth of the economy or market sector wherein you hold the stocks. Another benefit is income in the form of a dividend. This is an annual payment to investors and it represents profit earned in the fiscal year. These payments arrive even if the stock has lost value. Stocks can be easily liquidated in the event of cash crunch or the need to cut losses in a bearish trend.
The high demand for petrol and petroleum-based commodities backed by tax incentives offers a great investment opportunity for investors in oil. With advancements in crowdfunding technology and regulations. Investment in oil through crowdfunding platform can start for as low as $1,000 and some platforms have created a structure to pass through unique oil and gas tax benefits to the investor.
Investment in the oil and gas industry for individuals and small companies take different forms and risk/reward components. Investment portfolio in the oil and gas industry for small companies and individuals includes; mutual funds or ETFs, partnerships, royalty interest and working interest.
Mutual Funds or ETFs: This investment method poses the least amount of risk for the investor but it does not offer any of the tax benefits. Investors will pay tax on all dividends and capital gains, just as they would with other funds.
Partnerships: Partnerships in oil and gas investments can take several forms with limited partnership being the most common, this sort of partnership limits the liability of the entire producing project to the amount of the partner’s investment. They are sold as securities and must be registered with the Securities and Exchange Commission (SEC). Tax incentives are available on a pass-through basis. The partner will receive a Form K-1 each year detailing his or her share of the revenue and expenses. This sort of investment is direct and provides a stable base for investors looking at a minimal risk portfolio.
Royalty Interest: Refers to ownership of a portion of the resource or revenue that is produced. A company or person that owns a royalty interest does not bear any of the costs of the operations needed to produce the resource, yet the person or company still owns a portion of resource or revenue produced. Holders of royalty interest are not eligible for tax benefits enjoyed by holders of partnership and working interests.
Working Interests: This is the investment with the most risk and is the most involved way to participate in the oil and gas Industry. This sort of investment allows investors own a percentage ownership of the drilling operation, functioning as a form of lease, providing the investor a right to take part in drilling activities and a right to the resources produced from that activity. Along with deriving an income from the production of the resource, the investors are also responsible for a percentage of the expenses related to its acquisition. Investors with working interests are often eligible for certain tax deductions based on the operating costs associated with the business. This can include business expenses of a tangible or intangible nature, such as equipment costs, wages or utility payments.
Whatever your choice, a well-diversified portfolio will provide most of the benefits and fewer disadvantages than stock ownership or oil investment alone. This means you should have a mix of stocks, bonds and commodities. Research has shown that, over time, it’s the best way to gain the highest return at the lowest risk.