Investing in oil stocks seems like a slam dunk way to make a lot of money. After all, the trend of oil prices seems to inevitably creep upward, so the value of the related stocks must do so as well, goes the thinking of unsophisticated investors. However, not only is the perception that oil prices move inexorably upward inaccurate, there is no necessary relation between the price of oil and the price of the stocks associated with it.
There may be no other commodity in the market place as subject to political manipulation as is oil. Given that oil is in virtually universal demand, and demand is growing as Third World countries make a push for economic growth, oil producing countries with political axes to grind, such as those in the Middle East and Venezuela, can send shudders through the oil markets on a whim. These convolutions can have an impact on the price of oil stocks in the short term. However, even politically volatile nations can't afford to turn off the tap indefinitely, so the effect on the long term prices isn't as great as one might think. Historical oil prices and historical oil stock prices have a tendency to be more stable than their short term prices.
This would seem to indicate two things. First, there is money to be made by trading on a daily basis, as short term swings can produce very volatile changes in stock prices. Second, there is money to be made by means of long term investing, as values based on historical performance tend to even out and generate gains based on the long term strategies of particular companies.
For those with the ability and knowledge to follow and assess the significance of short term trends in oil prices on the value of these stocks, trading in the stock of individual companies on a daily basis can create quick profits. However, this is an incredibly demanding task, and investment houses employ armies of highly trained and experienced analysts to keep up with these movements. Rare is the individual investor with such resources, although one can subscribe to services that provide real time updates of the state of the market.
At the other end of the investment strategy spectrum, one can choose to invest in oil related mutual funds. In this case, one puts one's money into the hands of trading specialists who invest in a 'basket' of oil stocks. The shares of these companies are valued at the end of each trading day, and can be bought and sold based on those values. There is no ability to instantly know the value of each share of a mutual fund, so these investments tend to be made for the longer haul than trading in individual stocks.
For those who like the idea of spreading their investment across a number of oil stocks, but also want the ability to make instant trades based on daily market developments, there are exchange traded funds, or ETF's. One can invest one's funds with these funds rather like a mutual fund, but shares of these funds can be traded based on current values as measured throughout each day. It still requires close monitoring of political and other market developments, but the volatility of the investment is reduced by the fact that more than one company is represented by the shares, so developments affecting a particular company are watered down.
Whichever manner of trading one might choose, oil stocks show historical long term gains, in general.
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