Investing in copper stocks works best for you when the focus is on well-established mining companies with high-quality reserves and sound finances

To succeed while investing in copper stocks, we continue to recommend that you cut your risk in the often-volatile resource sector—including copper—by investing mainly in profitable, well-established mining companies with high-quality reserves.

Use caution when investing in copper stocks, and you could enjoy long-term gains

Many industrial uses of copper can give copper stocks an advantage over gold and other precious metal stocks.

Traditionally, investors have bought copper stocks as a way to profit from general economic growth. Copper has a wide range of industrial uses (unlike gold and silver, which are thought of more as hedges against inflation). Copper is heavily used in the power-transmission and construction industries, in cables, wires and plumbing.

Stocks of firms that produce base metals, including copper, generally have higher dividend yields than gold stocks. As well, they’re usually much cheaper than gold stocks in relation to their earnings and cash flow. That means they potentially have less room to fall if markets fall. That’s just another way of saying they can be considered somewhat less risky than gold and other precious metals.

Copper should benefit not just from rising demand, but also from tightening supply. In the short term, labour problems and technical delays will continue to slow global copper production.

Over the longer term, ore grades are also falling at many major mines around the world as producers use up the easy-to-mine ore zones in their copper deposits. Environmental issues are also making it harder for companies to acquire permits for new mines.

How Mining Stocks make a difference Learn everything you need to know in 'The Complete Guide to Mining Stocks' for FREE from The Successful Investor. Best Canadian Mining Stocks TSX: Plus Gold Stocks, Canadian Diamond Mines and more.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

To sum up, we like copper’s long-term prospects. But as always, stay out of promotional penny mines that are merely drilling for copper. Also stay out of investment vehicles (like options or futures) that will only make money for you if copper keeps going up in the short term.

All in all, most investor portfolios can include exposure to the Resources and Commodities sector of the economy, and that includes copper stocks. At the same time, though, resource stocks (and this includes oil and gas, of course) should in general make up only a limited portion of your portfolio.

Increase your profits from investing in copper stocks by choosing the right companies. Here are some tips:

Mining stocks can generally be broken up into two categories, majors and juniors. Majors are mining companies that have been in the mining business for many years and more often than not they operate on a global scale. Majors have proven methods for exploration and mining, and have consistent output year over year.

When we research a junior mining stock to recommend in our investment services and newsletters, we like to see a mine-finding effort that focuses on high geological probabilities and doesn’t simply attempt to piggyback on the popularity of areas that are in the limelight because of a recent rich find.

It is sometimes said that a single drill hole has a 1-in-1,000 chance of turning up an “anomaly,” or a drill result that could be a marker for a mineral deposit. However, the odds against finding a mine on any one anomaly are also about 1,000-to-1. So, the odds that a particular drill hole will lead to the discovery of a valuable deposit are about a million-to-one. That’s why we never recommend juniors that have much or all of their value riding on a single drill hole. Instead, we want to see a series of promising drilling results, along with other encouraging development work.

Buying junior-mining stocks is risky. It can pay off extremely well when it succeeds, of course. But, in addition to the geological odds lined up against success, it’s much easier to launch and promote a junior-mining stock than it is to find a mineable deposit.

That’s why junior mining stocks are so common, even though profitable mines are rare. It’s also why many juniors fail, and why they should make up only a very small part of your portfolio.

With junior mining stocks, it’s very easy for speculative stocks with few real assets or very early-stage assets to trade at very high levels only to come crashing down once the crowd moves onto the next big thing.

It’s also best to avoid stocks trading at unsustainably high levels as a result of investor mania or broker hype. Penny stocks are susceptible to extreme highs and lows that can be influenced by such things as a major investor selling their stock (which could easily destabilize the financing of the company). They can also be dramatically influenced by a positive news report (which, in the case of penny stocks, could send the price soaring, but for all the wrong reasons).

Use our three-part Successful Investor philosophy to profit when investing in stocks—including investing in copper stocks:

1. Invest mainly in well-established, mostly dividend-paying companies;
2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities);
3. Avoid or downplay stocks in the broker/media limelight.

Some economists look at copper demand as a faithful indicator of consumer sentiment. What are your thoughts, especially considering the economic growth expected long term?

This article was originally published in December 2021 and is regularly updated.