When you invest in energy stocks, make oil and gas stocks at most half of your resource investments, as part of a diversified portfolio.
Energy stocks include businesses engaged in the exploration for, extraction and delivery of energy sources such as natural gas, oil, uranium and coal.
Below are some tips if you want to invest successfully in energy stocks.
When it comes to Canadian oil stocks, it may actually be different this time
Oil shot up into the financial stratosphere in the early 1970s, partly because of political developments. Since then, its price has repeatedly gone through dramatic moves, up and down. After each plunge, prices rebounded sharply. It’s easy to assume the same kind of rebound will follow the latest plunge.
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This time, however, is different. The improving technology of the past decade has opened up vast new potential oil sources.
Our advice is for most investors to maintain some exposure to the oil industry as part of the Resources segment of your portfolio. Overall, though, now is a particularly good time to stick to our three-part Successful Investor approach: Invest mainly in well-established, mainly dividend-paying stocks; spread your money out across most if not all of the five main economic sectors; downplay or avoid stocks in the broker/media limelight.
Perhaps half the money you intend to invest in the Resources sector should go into oil and gas stocks.
Should you invest in energy stocks as revolutionary industry changes take place?
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.
When these countries find their concentration on oil is hurting them, they may start to modernize their politics and business practices. Meanwhile, they may raise their oil production to force oil prices down. This will cut the incentive, at least temporarily, for western countries to invest in shale oil and gas commodity investments
Of course, environmental opposition could also slow the rise 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.
When you invest in renewable energy stocks you face rapidly changing technology
Renewable energy stocks like solar power and wind power have dominated the green stock expansion of the past couple decades. Extensive investment in these areas has quickly moved the technology forward for their entire industries.
For example, advances in manufacturing techniques continue to steadily push down the prices of solar cells and solar panels. As well, alternatives to costly silicon, which is currently used in most solar cells, are emerging. These include technological advances like copper-indium-gallium-selenium solar cells.
Note, though, that focusing on renewable energy stocks that are solely focused on developing or using a single technology—and don’t have a source of conventional power production like hydroelectric or natural-gas fired plants to provide cash flow—adds a lot of risk.
That’s because they constantly risk being overtaken by competitors with a superior product. As well, customers may hold off purchasing their solar or wind equipment if they believe a new technology is about to emerge. For these reasons, we also think you would be far better off investing in companies with the research budgets to keep ahead of the competition and move quickly to embrace new technological developments.
What to know if you want to invest in energy stocks involving solar power companies
The reason why people invest in solar power companies is obvious—a pure source of clean, endlessly renewable energy that can replace fossil fuels like oil, coal and natural gas sounds like a great investment. However, like many alternative energy sources, solar power has vast potential—but also risk to match:
Reliance on government subsidies
Competition from alternative power sources
Rapidly changing technology
We recommend that investors take special care when investing in solar energy.
Do you invest in energy stocks currently? What energy stocks do you own? Share your experience with us in the comments.
Comments
Sid
I have a large proportion of my investible dollars in energy, primarily, pipeline, alternative energy like solar: FSLR, CSIQ, Also hydro and alternative energy producers: NEE, NGG, INE. I also retain Pengrowth because i believe gas will surge, eventually and Has potential for good % gains.
Sid
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I have a large proportion of my investible dollars in energy, primarily, pipeline, alternative energy like solar: FSLR, CSIQ, Also hydro and alternative energy producers: NEE, NGG, INE. I also retain Pengrowth because i believe gas will surge, eventually and Has potential for good % gains.
Sid