It’s important to follow these tips if you’re considering energy stocks to invest in

Energy stocks include businesses engaged in the exploration for, extraction/production and delivery of energy sources such as natural gas, oil, and alternative and renewable power.

The best energy stocks to invest in mainly include well-established, primarily dividend-paying stocks. We recommend spreading your money out across most if not all of the five main economic sectors, and downplay or avoid stocks in the broker/media limelight—and that includes the resources sector.

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Energy stocks to invest in: How has fracking revolutionized the oil and gas industry?

Shale development boosts oil production as well as natural gas. This depresses the profit margins of current oil producers, and in some ways that’s a good thing. Many of today’s top oil-producing countries have been corrupted by their oil wealth. Oil gave them all the money they needed, and provided little incentive to build the legal and physical infrastructure for other types of economic activity.

Of course, environmental opposition could also slow the prominence of shale oil and gas production. The shale industry, like any new industry, needs to develop environmentally safe operating procedures.

The most controversial procedure is the hydraulic fracturing, or fracking, of hydrocarbon-bearing shale. This process involves pumping a mix of water, chemicals and other materials into shale rock formations that contain oil or natural gas. This fractures the rock and releases the oil and gas. Some environmentalists are worried that fracking chemicals will leak into drinking-water supplies.

But governments have to weigh environmental opposition against the vast increase in jobs and tax collections that shale development brings.

Oil supply and demand—and its impact on energy stocks to invest in

Oil optimists assume that demand for oil will keep on growing indefinitely, as more people around the world buy cars. But oil supply can also keep on expanding indefinitely. That’s thanks to technological advances mentioned above, that has opened up vast new oil reserves in shale deposits around the world. Environmental regulations make it difficult to tap into these deposits in some areas, of course. Meanwhile, political turmoil in the Middle East, Nigeria and Venezuela make future supplies of conventional oil more erratic and uncertain.

Politics, weather and market sentiment will determine whether oil users stock up on oil, or cut down on new buying while they use up existing inventory. This can have a big impact on oil-price trends and the profits of oil company stocks.

When oil company stocks hit bottom, they may turn around and shoot back up again, as they have a number of times in the past. Or they may instead go sideways for months or years.

No matter how intently you read the news on oil, you won’t gain any worthwhile advantage. You have too much competition. This market is simply too big and too widely traded for anybody to figure it out. To offset, buy high-quality energy producers that will gain from higher output over time.

Ethanol stocks can be promising energy stocks to invest in—but with risks to match

Ethanol as fuel, and ethanol stocks as an investment, have a lot of conceptual appeal, especially with investor interest rising for non-hydrocarbon (oil, coal, natural gas), lower-polluting energy sources. However, many ethanol stocks will have difficulty showing profits for a number of years. Several new ethanol plants will open in the next few years, which could lead to oversupply and lower prices. Lower oil prices have also undercut ethanol’s appeal.

We think the best way to profit from increased long-term ethanol use is through a stock like Archer Daniels Midland, symbol ADM on New York. Archer Daniels is the world’s largest producers of corn-based ethanol, but also has a broad base of other businesses. Above all, avoid trying to profit in ethanol futures and options.

Green energy stocks offer only a limited amount of investment appeal

Successful renewable and green energy stocks use steady research spending to come up with pioneering technological advances—and successful investors now recognize that research and development spending is today’s best-hidden asset.

Companies have to treat this research spending as a day-to-day expense, much like maintenance or tax payments. So research spending comes right out of their current years’ earnings. But when they do it right, research and development spending is more like a long-term investment than an expense.

When it pays off, it can yield dramatic long-term gains—but the risks are high with green energy stocks. To cut your risk, we recommend that you focus on alternative energy stocks that already have a sound base of other operations. That helps offset the risks of expanding into renewable-power production.

Do you have interesting types of energy stocks to invest in? What are they and how did you find them? Share your thoughts with us in the comments.