Articate

Many people enjoy investing in oil stocks because of the simple reason that you can make some huge profits if you invest in the right companies. There is also the fact that oil is a finite resource and will eventually run out, meaning that the oil price should keep on going up as the supply gradually diminishes over the years. However you really have to do your homework if you want to make some serious profits investing in oil stocks.

A lot of investors think they know how to successfully invest in oil stocks. You simply go to some of the investing forums, read the various threads where people talk about each of the small oil companies that are listed on the stock market, and put your money into the ones that are likely to strike oil and therefore start making huge profits.

This can work and I’m sure there are lots of investors that have picked a few multi-baggers by doing this type of research. However you have to bear in mind that for every small oil company that finds oil and starts making big profits as a result, there will probably be at least nine or ten other companies that will either fall by the wayside and go bankrupt, or just keep on making losses year after year desperately trying to make that crucial breakthrough.

So the odds of making some big gains from oil stocks are actually quite slim. There are lots more failures in this particular sector than successes.

Another point to bear in mind is that the forums are full of rampers and speculators. So because of this, you will often get a lot of false or misleading information being posted in order to try and ramp up the share price. Plus there will also be lots of rumours posted, which may never amount to anything. All of which makes it very difficult to separate real factual information from false information, and so you are effectually just gambling with your money when you buy any of the small-cap oil explorers.

Therefore if you do want to invest in oil stocks, you should be very cautious and do as much (proper) research as you can. For example you should look at the management of each company and check out their track records. There will be some that have had huge success with other companies, and may well be worth following, whilst there will be others that will have limited or no track records running similar types of companies in the past.

You should only really invest a small percentage of your overall capital into these high risk plays. Even the really promising oil companies that have strong management teams and are expected to do well, can ultimately disappoint and go bankrupt. If there was such a thing as a stock market graveyard, it would be full of oil companies that had everything going for them, with lots of fans on the various forums, but which ultimately never managed to make a profit and ultimately went bust.

If you want to take advantage of a rising oil price in future years without exposing yourself to too much risk, then you could consider investing in crude oil ETFs at opportune moments, or invest in some kind of mutual fund that does all the research and invests in a basket of companies themselves.

The point is that there is money to be made in the oil sector, but you don’t necessarily have to take huge risks investing in some of the tiddlers in order to make money. In fact it is recommended that you invest small amounts or avoid doing so altogether, because you could easily lose everything if they happen to go bust, which is not out of the question.