invest Archives | Page 82 of 182

Sep

2023

How to Invest in Opportunity Zone Funds

By Brian O'Connell | Growing Wealth, invest, Investing | Comments Off

The Qualified Opportunity Zone program is an initiative aimed at incentivizing investors to allocate cash to economically distressed communities who could benefit from the capital.

The Qualified Opportunity Zone program, highlighted by the Community Development Financial Institutions Fund, was rolled out as part of the 2017 Tax Cuts and Jobs Act. The program allows some U.S. investors to offset capital gains taxes under certain conditions by investing in some communities.

What Is an Opportunity Zone Fund?

Opportunity Zone (OZ) Investment Funds are a type of alternative investment fund that offers capital gains tax relief for some investments aimed at revitalizing communities. Opportunity Zones represent what the Internal Revenue Service calls an “economic development tool,” designed to accelerate economic development and job creation in economically struggling U.S. communities.

The Treasury Department determines eligible Opportunity Zones, of which there are thousands spread across the United States. Corporations or partners establish an Opportunity Zone Fund and use it to invest in properties located in a recognized opportunity zone.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

How to Invest in a Qualified Opportunity Zone Fund

To take advantage of the tax-efficient investment benefits of OZ investing, interested partners must first register as a corporation or partnership, complete IRS form 8996, and file the form along with their federal tax returns. After gaining approval by the IRS, the fund must commit at least 90% of its assets to a specific Opportunity Zone. Once that threshold is cleared, the QOF is eligible for capital gains tax relief.

Qualified Opportunity Fund Investment Requirements

The money that Qualified Funds invest in distressed communities must also fit the Treasury Department’s criteria of an Opportunity Zone investor.

• The Fund must make significant upgrades to the community properties they invest in with fund dollars.

• The investment must be made within 30 months of becoming eligible as a Qualified Opportunity Fund.

• The investment must meet specific Treasury Department financial investment standards. In other words, the investments made in community properties must be equal or superior to the original value paid by the Opportunity Zone investment fund. For instance, if an Opportunity Zone Fund purchased a distressed property for $500,000, that investor has the 30-month window to steer at least $500,000 into the Opportunity Zone property improvements.

• Some Opportunity Zone properties qualify for opportunity funds (private and multi-family homes, business settings and non-profit properties) and some don’t. For example, golf and country clubs, liquor stores, massage parlors, and gambling facilities do not qualify as Opportunity Zone investments.

• The investor must commit to a timely investment in Qualified Opportunity Funds – the longer the time, the bigger the capital gain deferral. The IRS says the tax deferral may last until the exact date on which the Qualified Opportunity Fund is sold or exchanged, or by December 31, 2026. By law, the investor has 180 days from a capital gains sales event to turn those gains into an Opportunity Zone investment.

• The funding program is tiered, with a 10% tax exclusion offered to investors who hold a Qualified Investment Fund investment for at least five years. If the investor holds the investment for seven years, the tax exclusion rises to 15%. If the investor stays in for 10 years or more, the IRS allows for an adjustment based on the amount of the QOF investment based on its fair market value on the exact date the investment is sold or exchanged. Any appreciation in the fund investment isn’t taxed at all, according to the IRS.

• Opportunity Zone investors don’t have to physically reside in the communities they financially support, nor do they have to hold a place of business in that community. The only criteria for eligibility is making a qualified financial investment in an eligible, economically distressed community and the ability to defer the tax on investment gains.

Opportunity Zone Investment Considerations

Investors looking to defer capital gains taxes may view Qualified Opportunity Funds as an attractive proposition. Before signing off on any Opportunity Zone commitments, however, investors may want to review some key facts and investment risks worth keeping in mind when investing in OZs.

Real Estate as an Investment

Since Opportunity Zone funding focuses on distressed communities, most investments are real estate oriented, making it an alternative investment that may be part of a balanced portfolio. Typical Opportunity Zone investments include multi-family housing, apartment buildings, parking garages, small business dwellings/strip malls, and storage sheds, among other structures.

Recognize the Up-Front Cost Realities

Opportunity Zones are a high priority for public policy administrators, which is one reason QOFs require high minimum investments. Up front minimums of $1 million aren’t uncommon with Opportunity Zone Funds, and investors should know that going into any funding situation. In most cases, that means that accredited investors are more likely than other individuals investors to take advantage of OZ investing.

Your Cash May Be Tied up for a Long Time

To optimize the capital gains tax break, Opportunity Zone investors should count on their money being tied up for 10 years. Funds need that time to collect and disseminate cash, choose the appropriate potential properties for investment, and conduct the actual remodeling or upgrades needed to turn those properties into profitable enterprises. Thus, lock-up timetables can go on for a decade or longer.

Management Fees Can Eat into Portfolio Profits

Like any professionally managed financial vehicle, Qualified Opportunity Funds come with investment fees and expenses that can cut into profits. While many investors opt for Opportunity Zone investments for the tax breaks, those investors may also expect their investment to generate healthy returns. To get those returns, they can expect to pay the fees and expenses associated with any professional managed investment fund.

The Takeaway

Investing in Opportunity Zone funds allows some U.S. investors to offset capital gains taxes under certain conditions by investing in some communities. These funds are a type of alternative investment that may be an attractive addition to a portfolio.

Above all else, Opportunity Zone funds come with a healthy measure of risk, including investment risk, liquidity risk, market risk, and business risk. While the promise of a tax break and the opportunity to boost worn-down U.S. communities are appealing, any decision to invest in Opportunity Zones should be made with the consultation of a trusted financial advisor –- ideally one well-versed in tax shelters and real estate investing.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

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Sep

2023

What Is Quadruple Witching?

By Matthew Zeitlin | Financial Independence, Growing Wealth, invest, Investing | Comments Off

Quadruple witching refers to the simultaneous expiration of four popular investment contracts, creating wild market conditions. Given its name, it may just be the spookiest day of the year for investors – sorry, Halloween! Quadruple witching day occurs on the third Friday in March, June, September, and December.

The last hour of those trading days is known as the “quadruple witching hour”, when many derivatives contracts expire, often creating volatility in the markets. That’s because there may be higher market volume on those days as traders either close out or roll over their positions.

What is Quadruple Witching Day?

Quadruple witching, or quad witching, is trader’s terminology for the four dates on the calendar when four kinds of options contracts expire: stock options, stock index futures, index options, and stock futures.

Each of the contracts has expiration dates that will match up each quarter, which is why quadruple witching, or quad witching, happens in the third, sixth, ninth and twelfth month of the year respectively. The expiration for these contracts happen at the same time in the day — the afternoon.

While events like quadruple witching may not impact how and when you invest (especially if you’re investing for the long term), they are a good reminder of the investment risks that any investing strategy or approach brings.

How much attention individual investors pay to witching day may depend on their investing philosophy and their time horizon. Since quad witching can result in short-term volatility, many passive investors may ignore them entirely. On the other hand, active investors who try to time the market and get in and out of trades quickly in the most advantageous manner, may use them to inform their strategy and consider buying or selling witching hour stocks.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

Contracts Involved in Quad Witching

To understand quadruple witching, you have to first understand the different options contracts involved. Stock index futures, stock index options, single stock futures and single stock options are all derivatives, meaning their value corresponds to the value or change in value of an underlying asset. The underlying assets are either stock market indexes, like the S&P 500, or individual company stocks.

Options contracts give holders the right, but not the obligation, to buy or sell a stock at a certain price at a future date. Futures contracts are contracts to purchase shares of a given stock at a certain price in the future.

For indices, futures and options are contracts on the value of an equity index. Investors often use these either to hedge or make outright speculations on the moves of an index. All four derivatives are complex investments that involve risks when playing the market, and they’re more often used by professional traders and institutional traders than retail investors.

How Does Quadruple Witching Affect the Market?

Quadruple witching days are those four days of the year when these types of contracts all expire, those who bought contracts and choose to exercise them will receive their stock or cash, or they make additional transactions to take advantage of arbitrage opportunities.

This can lead to more buying and selling of shares than is typical for a given day or, especially a given hour. Increased volume can mean more volatility in the markets and the possibility of large swings during the day.

One reason these days can cause hiccups in the markets is that while certain positions expire, investors may want to extend them. This means they have to “roll” the bet in order to keep it active, potentially forcing other players in the market to buy or sell, especially if the market is already volatile or choppy.

For trades that involve the transfer or automatic buying of stock, like options trades on individual shares, the quadruple witching date can mean automatic buying up of shares to fulfill the options contracts, leading to spikes even if there is no “fundamental” reason for them.

Overall, volumes in options trades can go up on quadruple witching days, which can sometimes have knock-on effects on the price of the underlying assets involved in options contracts.

The Takeaway

Quadruple witching day occurs on the third Friday in March, June, September, and December. The last hour of those trading days is known as the “quadruple witching hour”, when many derivatives contracts expire, often creating volatility in the markets. That’s because there may be higher market volume on those days as traders either close out or roll over their positions.

Quadruple witching offers an opportunity to understand how market mechanics can affect actual prices, but it may not impact the strategy for most long-term investors. More experienced investors and traders may find profitable opportunities, however, as the markets enter a period of volatility.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

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Sep

2023

Learn 7 Strategies to Double Your Money

By Rebecca Lake | Growing Wealth, invest, Investing, Terminology | Comments Off

Figuring out how to double your money with investments often hinges on striking the right balance between risk and reward. Your personal risk tolerance and goals can influence how you invest and the returns your portfolio generates.

However, doubling your money is a reasonable goal, especially if you’re willing to wait for your money to grow. And that’s a big variable to keep in mind: Time. If you’re interested in doubling your money and growing wealth for the long-term, there are several investing strategies to consider.

Investing Strategies to Double Your Money

1. Get to Know the Rule of 72

The rule of 72 can be a helpful guideline for answering this question: How long to double your money?

If you’re not familiar with this investing rule, it’s not complicated. It uses a simple formula to estimate how long doubling your money might take, based on your annual rate of return. You divide 72 by your annual return to get the number of years you’ll need to wait for your investment to double.

So, for example, if you have an investment that generates a 5% annual return, it would take around 14.5 years to double it. On the other hand, an investment that’s generating a 12% annual return would double in about six years.

The rule of 72 doesn’t predict how an investment will perform. But it can give you an idea of how quickly (or slowly) you can double your money, based on the returns you’re getting each year. Just keep in mind that the rule’s accuracy tends to decrease as the rate of return increases, so it’s more of a guideline than a hard-and-fast rule.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

2. Leverage Your Employer’s Retirement Plan

One way to attempt to double your money through investing may be through your workplace retirement plan. If your employer offers a matching contribution to the money you’re deferring from your paychecks, that’s essentially free money for you.

Employer matching contributions are low-hanging fruit, in that you don’t need to change your investment strategy to take advantage of them. All that’s required is contributing enough of your salary to your employer’s retirement plan to qualify for the match.

The matching formula that companies use varies, but some companies offer a dollar-for-dollar match, meaning that the money you put into a 401(k) would automatically double when you receive your match. Keep in mind that some companies use a vesting schedule, meaning that you have to work at the company for a certain period of time before you get to keep all the employer contributions.

Aside from potentially helping to double your money, investing your 401(k) or a similar qualified retirement plan can also yield tax benefits. Contributions made with pre-tax dollars are deducted from your taxable income, which could lower your annual tax bill.

3. Diversify Strategically

Diversification means spreading your money across different investments to create a portfolio that will meet your needs for both risk and return.

As a general rule of thumb, riskier investments like stocks have the potential to generate higher returns. More conservative investments, such as bonds, tend to generate lower returns but there’s less risk that you’ll lose money on the investment.

If you want to double your money, then it’s important to pay attention to diversification and what that means for your return on investment. For instance, if you’re investing heavily in stocks then you could see greater returns but you might experience deeper losses if the market takes a hit. Playing it too safe, on the other hand, could cause your portfolio to underperform.

Also, keep in mind that there are many types of investments besides stocks, mutual funds and bonds. Real estate, stock options, futures, precious metals and hedge funds are just some stock and bond alternatives you could use to build a portfolio. Understanding their risk/reward profiles can help you decide what to invest in if you’re focused on doubling your money.

💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

4. Consider Buying When Others Are Selling

The stock market is cyclical and you’re guaranteed to experience ups and downs during your investing career. How you approach the down periods can impact your ability to double your money when the market goes up again.

When the market drops, some investors start selling off stocks or other investments to avoid losses. But if you’re comfortable taking risks, the sell-off could present an opportunity to buy the dip.

If you can purchase stocks at a discount during periods of volatility when other investors are selling, you could double your money when those same stocks increase in value again. But again, making this strategy work for you comes down to knowing how much risk is acceptable to you.

5. Commit for the Long Term

There are different investment philosophies you can adopt. For example, traders regularly buy and sell investments to try and get quick wins from the market. A buy-and-hold strategy takes a different approach, but it could pay off if you’re trying to double your money.

Buy-and-hold investing involves buying an investment and holding onto it for the long-term. The idea is that during that holding period, the investment will grow in value so you can sell it at a sizable profit later.

This is a passive investment strategy that relies on patience and time to increase your portfolio’s value. The longer you have to invest, the more you can capitalize on the power of compounding gains, or gains you earn on your gains.

If you’re using a buy-and-hold strategy with a value investing strategy, you could potentially double your money or more if your investments meet your expectations. Value investing means investing in companies that you believe the market has undervalued.

This strategy takes a little work since you have to learn how to understand the difference between a stock’s market value and its intrinsic value. But if you can find one of these bargain hidden gems and hold onto it, you could reap major return rewards later when you’re ready to sell.

6. Step Up Your Investment Contributions

Another simple strategy to double your money is to invest more. Assuming your portfolio is performing the way you want and need it to to reach your goals, doubling your investment contributions could be a relatively easy way to boost your returns.

If you can’t afford to put big chunks of money into the market all at once, there are ways to increase your investments gradually. For instance, you could start building a portfolio with fractional shares and increase your contributions by a few dollars each month.

If you’re investing your 401(k) at work, you could ask your plan administrator about raising your contribution rate annually. For example, you might be able to automatically bump up salary deferrals by one or two percent each year. And if that coincides with a pay raise you may not even miss the extra money you’re contributing.

7. Focus on Tax Efficiency

Minimizing tax liability is another opportunity to stretch your investment dollars. There are different ways to do that inside your portfolio.

Investing in your retirement plan at work is an obvious one, so if you aren’t doing that yet you may want to consider getting started. Remember, the longer you have to invest, the more time your money has to grow.

If you don’t have a 401(k) or a similar plan at work, you could open a traditional or Roth Individual Retirement Account (IRA) instead. A traditional IRA allows for tax-deductible contributions, meaning you get an upfront tax break. Then, you pay ordinary income tax on that money when you withdraw it in retirement.

Roth IRAs aren’t tax-deductible, since you fund them with after-tax dollars. The upside of that, however, is that qualified withdrawals in retirement are 100% tax-free.

A taxable brokerage account is another way to invest, without being subject to annual contribution limits the way you would with a 401(k) or IRA. The difference is that you’ll pay capital gains tax on your investment growth.

Paying attention to asset location can help with maximizing tax efficiency across different investment accounts. For example, exchange-traded funds can sometimes be more tax-efficient than other types of mutual funds because they have lower turnover. That means the assets in the fund aren’t bought or sold as frequently, so there are fewer taxable events.

Keeping ETFs in a taxable account while putting less tax-efficient investments into a tax-advantaged account, such as a 401(k) or IRA, could help with doubling your money if it means reducing the taxes you pay on investment gains.

The Takeaway

Learning how to double your money can mean taking a slow route or a quicker one, but it all comes down to how much risk you’re comfortable with and how much time you have to invest. One of the keys to growing your investments is being consistent and that’s where automated investing can help.

There are numerous strategies and tactics that you can try to leverage to your advantage. But ultimately, whether you’re able to double your money will likely come down to how much you’re willing to risk, how much time you have on your side, and probably a little bit of luck.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

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Sep

2023

Front-Running Explained

By Samuel Becker | Growing Wealth, invest, Investing, Terminology | Comments Off

Front running is when a broker trades a financial asset on the basis of non-public information that will influence the price of the asset in order to profit. In most cases front running is illegal because the broker is acting on information not available to the public markets, for their own gain.

Front running is somewhat different from insider trading, where an individual investor working at a company is able to place a trade based on proprietary information about that company. Insider trading is also illegal.

There is another definition of front running, however, that involves index funds. This type of front running is not illegal.

Key Points

• Front running involves a broker trading a financial asset based on non-public information, typically making it illegal due to unfair market advantage.

• This practice is different from insider trading, although both involve using confidential knowledge for personal profit and are prohibited by regulatory agencies.

• Front running can occur when brokers anticipate significant trades or learn about impactful analyst reports, allowing them to act before the information is public.

• Real-world cases of front running have led to significant penalties, including multi-million dollar fines and prison sentences for those involved in fraudulent trades.

• While most forms of front running are illegal, index front running, which involves publicly announced changes to market indexes, is considered legal and commonly practiced.

What Is Front Running?

In short, front running trading means that an investor buys or sells a security (a stock, bond, etc.) based on advance, non-public knowledge or information that they believe will affect its stock price. Because the information is not widely available, it gives the trader or investor an advantage over other traders and the market at large.

Based on this definition of front running, it’s easy to see how the practice — though illegal — earned its moniker. Traders, making moves based on privately held information, are getting out ahead of a price movement — they’re running out in front of the price change, in a very literal sense.

In addition to stocks, front running may also involve derivatives, such as options or futures.

Again, although front running is technically different from insider trading, the two are quite similar in practice, and both are illegal. Front running is forbidden by the SEC. It also runs afoul of the rules set forth by regulatory groups like the Financial Industry Regulatory Authority (FINRA).

If a trader has inside knowledge about a particular stock, and makes trades or changes their position based on that knowledge in order to profit based on their expectations derived from that knowledge, that’s generally considered a way of cheating the markets.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

How Front Running Works

The definition of front running and how it works is pretty straightforward, and there are two main ways front running — also called tailgating — can occur.

• A broker or trader gets wind of a large upcoming trade from one of their institutional clients, and the size of the trade is sure to influence the price.

• Or the broker learns of a specific analyst report about a given security that’s likely going to impact the price.

In either case, the trader gains access to price-relevant information that’s not yet available to the public markets, and the broker is well aware that the upcoming trade will substantially impact the price of the asset. So before they place the trade, they might either buy, sell, or short the asset — depending on the nature of the information at hand — and make a profit as a result.

A Front Running Example

Let’s run through a hypothetical example of how one form of front running may work.

Say there’s a day trader working for a brokerage firm, and they manage a number of client’s portfolios. One of the broker’s clients calls up and asks them to sell 200,000 shares of Company A. The broker knows that this is a big order — big enough to affect Company A’s stock price immediately.

With the knowledge that the upcoming trade will likely cause the stock price to fall, the broker decides to sell some of his own shares of Company A before he places his client’s trade.

The broker makes the sale, then executes the client’s order (blurring the lines of the traditional payment for order flow). Company A’s stock price falls — and the broker has essentially avoided taking a loss in his own portfolio.

He may use the profit to invest in other assets, or buy the newly discounted shares of Company A, potentially increasing his long-term profits essentially by averaging down stocks.

The trader would’ve broken the law in this scenario, breached his fiduciary duties to his client, and also acted unethically.

Recommended: Understanding the Risks of Day Trading

Front Running in the Real World

There are many real-world examples of front running that have led to securities fraud, wire fraud, or other charges. Back in 2009, for instance, 14 Wall Street firms were hit with roughly $70 million in fines by the SEC for front running.

“The SEC charged the specialist firms for violating their fundamental obligation to serve public customer orders over their own proprietary interests by ‘trading ahead’ of customer orders, or ‘interpositioning’ the firms’ proprietary accounts between customer orders,” an SEC release read.

Further research into the topic of front running finds that when people (or firms) have insider knowledge that could benefit them in the markets, they’re likely to use it.

As for another real-world example of front running, there was a case in 2011 involving a large global bank, and some foreign exchange traders who found themselves in hot water. The two traders became privy to a pending order from a client, made some moves to get ahead of it, and ended up making their company money.

It was a $3.5 billion transaction, and by front running the trade, the traders were able to make more than $7 million. It’s not a happy ending, however, the people involved ended up sentenced to prison and ordered to pay hundreds of thousands of dollars in fines.

So, while front running does happen, there can be serious consequences if regulators catch wind of it.

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

Is Front Running Legal?

No. In almost all cases, front running is illegal.

Are There Times When Front Running Is OK?

Yes, actually. Index front running is not illegal, and is actually fairly common among active investors.

As many investors are aware, index funds track market indexes like the S&P 500 or Dow Jones Industrial Average. These funds are designed to mirror the performance of a market index. And since market indexes are really nothing more than big amalgamations of stocks, they change quite often. Companies are frequently swapped in and out of the S&P 500 index, for instance.

When that happens, the change in an index’s constituents is generally announced to the public, before the swap actually takes place. If a company is being added to the S&P 500, that’s probably considered good news, and can make investors feel more confident in that company’s potential. Conversely, if a company is being dropped from an index, it may be a sign that things aren’t going so well.

That gives some traders an opening to take advantageous positions. Let’s say that an announcement is made that Firm X is being added to the Dow Jones Industrial Average, taking the place of another company. That’s big news for Firm X, and means that it’s likely Firm X’s stock price will go up.

Traders, if they have the right tools, may be able to quickly buy up Firm X shares the next day, and potentially, make a profit if things shake out as expected.

How is this different from regular front running? Because the information was available to the public — there was no secret, insider knowledge that helped traders gain an edge.

The Takeaway

Front-running is the illegal practice of taking non-public information that is likely to impact the price of a certain asset, then placing a trade ahead of that information becoming public in order to profit. Front running is similar to insider trading, although the latter generally involves an individual investor who profits from internal company information.

Fortunately, there are plenty of ways to profit in the markets without resorting to fraudulent activity like front running.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

Why is front-running illegal?

Front running is illegal for a few reasons. First, it’s a form of cheating the market, by using non-public information for a gain. Second, in the case of institutional front running, it’s a violation of a broker’s fiduciary duty to a client.

How can I identify if my trades have been affected by front running?

Unfortunately, owing to the non-public nature of the information that typically leads to front-running, it’s very difficult for individual investors to determine whether or not their own trades have been impacted by a front-running event. Financial institutions have more tools at their disposal to detect incidents of front running.

Are there any technological solutions or tools available to detect and prevent front running?

Yes. With so many traders using remote terminals to place trades since the pandemic, trade surveillance technology and trade reconstruction tools are more important than ever. Fortunately, financial institutions have the resources to employ these tools, and other types of algorithms, to monitor the timing of different trades in order to identify front runners and front running.

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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

Sep

2023

How and Why to Invest in Oil

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

Oil is valuable, and one of the most widely used and widely traded commodities in the world. Despite the growth of many forms of alternative energy, oil remains essential to the functioning of industry and transportation around the globe.

Given all the factors that go into oil prices, it’s no wonder that they can fluctuate dramatically, often on a daily basis. The price of oil has an impact on a wide range of industries, and ultimately on the prices that consumers pay at the pump, in the supermarket, and beyond. That also makes it attractive to investors.

Ways to Invest in Oil

For those who are interested in incorporating crude oil investing in their portfolio, there are many ways to get started.

Oil Company Stocks

In addition to the massive global names, there are other companies that specialize in different aspects of energy production, oil exploration, drilling, equipment, delivery and more. There are also smaller oil companies with vertical operations, but only in specific parts of the world. Each of those types of companies will perform differently depending on the many geopolitical, economic, technological, and other factors that drive the price of oil up and down.

Oil Funds

Not every investor has the time or interest to research a host of oil companies. For those investors, a better approach might be investing in a mutual fund or exchange-traded fund (ETF) that focuses on the oil sector, or more broadly on the energy sector.

Since thematic ETFs and mutual funds hold many securities, they offer investors a level of diversification within their portfolio.

Exchange-Traded Notes (ETNs)

Exchange-traded notes are a vehicle that invests directly in oil futures contracts. Investors like them because they offer easy access to oil futures, without some of the other factors that can affect the performance of oil companies, such as currency fluctuations and swings in the equity markets. Because they buy oil futures directly, ETNs can offer investors a more direct investment in the price of oil.

Derivatives

More sophisticated investors may also consider investing in the derivatives markets, buying futures, and options. Crude oil options trade on the New York Mercantile Exchange (NYMEX) and on the ICE exchange.

Alternative Investments

Investors interested in alternative investments might get exposure to oil by purchasing mineral rights or buying into Limited Partnerships (LPs) that invest throughout the sector.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

Trends in Oil Investing

crude oil prices 2023-2024 vs inflation expectations

Oil prices plummeted in 2020, as pandemic-associated lockdowns drove U.S. oil prices into negative territory for the first time in history. In April 2020, investors bid the price for West Texas Intermediate (WTI) from $18 per barrel, down to roughly negative $37 a barrel.

Later that year, oil prices began to normalize. Demand returned in 2021, and oil prices shot back up in 2022, when they reached levels not seen in decades. In 2023, prices did fall a bit again — but the point is that prices are always on the move. Given the unpredictability of the global economy, too, it’s very difficult to determine how oil prices will perform going forward.

Forces That Drive Oil Prices

There are many factors that determine oil prices. That, in turn, can affect prices for gasoline and more. Here are some of the forces at play.

The Organization of Petroleum Exporting Countries (OPEC)

Another important contributor to oil prices is the Organization of Petroleum Exporting Countries (OPEC), a group of 13 oil-producing countries, including Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, the United Arab Emirates, and Venezuela.

Together, they’re responsible for nearly 80% of the planet’s oil supply. As an organization, OPEC meets regularly to set production levels. And its decisions can directly change the price of oil and gas. And while it has a massive influence on the price of oil, it doesn’t control the price.

Market Fundamentals

The global oil market is a force in its own right, as supply and demand tend to fluctuate sharply and unpredictably. There can be too much supply. Within OPEC, members don’t always follow through on the limits they agreed upon limits. There are also major oil suppliers, such as the United States, who are not OPEC members who may produce more oil than expected. That can cause high levels of supply relative to demand, which can drive down prices.

Production Costs

Oil in Canada’s oil sands or American shale reserves is far more labor-intensive and expensive to extract and refine than the oil in the Middle East. Those extraction costs contribute to the price of the oil, which can drive the oil prices higher or lower, depending on where the bulk of supply is coming from at any given time.

Natural Disasters

Oil prices are also susceptible to change as a result of natural disasters. Hurricanes, for example, regularly shut down oil production in the Gulf of Mexico, which can reduce the supply of oil and drive prices up.

International Relations

The headlines, especially international ones, can also drive oil prices. A significant amount of the world’s oil comes from the Middle East. Political instability in that region creates investor uncertainty, which can lead to price fluctuation. The same goes for countries like Russia, which produce a lot of oil, but as of 2023, are involved in geopolitical conflicts.

Economic Factors

While not always the case, recessions and economic turmoil can push oil prices lower.

The relative strength of the U.S. dollar also plays a role in the price of oil. The thinking is that a strong dollar allows American oil companies to buy more oil, and cut the cost to U.S. consumers, who buy 20% of the oil on the market.

However, while oil does not typically perform well during a recession, it does typically become more attractive to investors later in the business cycle.

The Takeaway

Oil is always in demand, and fluctuates a lot in price, which may make it attractive to many investors. But it’s a volatile investment, which can make investing in oil a risky endeavor. Given that many people are focused on renewable energy sources, too, investing in oil may not be as attractive as it once was.

The volatility of oil and its importance to the global economy makes it an important asset class for many investors. But again, it’s risky — so, whether you decide to invest in oil or oil-adjacent sectors and companies should be given considerable thought.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

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How and Why to Invest in Oil

Ways to Invest in Oil

Oil Company Stocks

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Alternative Investments

Trends in Oil Investing

Forces That Drive Oil Prices

The Organization of Petroleum Exporting Countries (OPEC)

Market Fundamentals

Production Costs

Natural Disasters

International Relations

Economic Factors

The Takeaway

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