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What Is a Robo-Advisor?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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A robo-advisor is a digital investment advisor that creates a portfolio on your behalf, usually with the help of algorithms. Many robo-advisors have basic guidelines and use the principles of Modern Portfolio Theory (MPT), which asserts that asset allocation matters more than the individual investments in a portfolio when deciding how to assemble your account.

If you’re looking for help choosing the investments to build your portfolio, a robo-advisor can be a great option. We’ll take a look at robo-investing so you can decide if it’s right for you.

 

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What is a robo-advisor and how does it work?

When signing up with a robo-advisor, you typically respond to a questionnaire that’s used to establish a general idea of your risk tolerance, investing time frame and financial goals. Once you’ve completed the questionnaire, a portfolio is constructed for you, usually from a selection of exchange-traded funds (ETFs) and similar investments. The idea is to create an asset allocation that matches the general principles of investing for those who have similar characteristics to you.

While some robo-advisors might offer some financial planning help and a small degree of customization, you probably won’t get fully tailored investment solutions. Instead, many investors are drawn to robo-advisors for their ease of use, low cost and low barrier to entry.

Many robo-advisors follow similar rules to other investment advisory firms and are registered with the U.S. Securities and Exchange Commission (SEC). They also carry SIPC insurance, protecting investors against failure by the firm.

Robo-advisor features

While not every robo-advisor offers the exact same features, here’s a sampling of what you might find.

  • Investment recommendations and portfolio management: You might receive suggestions for what percentage of your portfolio should be invested in certain asset classes. Some robo-advisors also offer performance projections so you can see how different adjustments can impact your potential returns.
  • Portfolio rebalancing: If your portfolio strays outside a desired asset allocation range, a robo-advisor might sell some shares and use the proceeds to buy others. With portfolio rebalancing, the goal is to help keep your asset allocation close to your desired makeup.
  • Tax loss harvesting: Depending on the robo-advisor, you might receive tax loss harvesting services, in which some of the holdings in your portfolio are sold in order to reduce your tax liability.
  • Financial planning tools: You might be able to access different financial planning tools, such as help planning for college or even assistance in creating a basic financial plan. However, some of these services might cost extra.
  • Impact investing: Some robo-advisors offer socially responsible investment choices or values-based. Those choices might come with higher expense ratios, but they allow you to use your money to make a positive social impact.
  • Access to a human advisor: In some cases, you can get access to a human financial advisor, whether through message, over the phone or by appointment. The amount of access you get can vary widely though, and such services usually cost extra or come with a higher annual management fee.

How much do robo-advisors cost?

Depending on the robo-advisor, you might pay an annual fee based on your account balance, or you might pay a flat monthly fee. For example, the average fee charged by robo-advisors, based on an account balance of $50,000, was 0.36% per year, or about $180. If you sign up for some robo-advisors, though, you might just pay a flat fee of $1 per month. Depending on your account size, that might be a better deal.

It’s important to note, however, that these management fees charged by robo financial advisors don’t always include the expense ratios from the ETFs they use. So that could add another layer of cost. However, ETFs, in general, have low expense ratios.

The cost of a robo-advisor vs. a traditional advisor or DIY investing

In general, one of the reasons that people consider a robo investment advisor has to do with the relatively low cost. With automated investing, there isn’t as much required of humans to manage your portfolio, so the idea is that costs are lower. On top of that, with robo investing, many of the portfolios are constructed using ETFs, which generally have low expense ratios. This also contributes to the relatively low cost.

On the other hand, a human investment advisor might charge more for their services. Many charge a percentage of your assets under management. According to a study by RIA in a Box, the total average fee for a traditional advisor is 1.17% of assets under management. This is over three times the cost of a robo-advisor.

You might be tempted to just manage your own investments to save money on management fees altogether. Some brokers have gotten rid of transaction fees for stocks and ETFs, making it possible for you to trade without paying these fees. However, you still have to pay expense ratios and other possible costs. Additionally, you might have to pay a transaction fee (in addition to fund fees) to trade mutual funds with some brokers. Most robo-advisors don’t charge transaction fees, as those are baked into the annual management fee.

Pros and cons of robo-advisors

When trying to decide if robo-advisors are worth it, you should compare the pros and cons. Here’s what you need to know.

Pros

  • Typically lower fees than with human advisors: With a robo investing, you can usually invest for a lower cost than you’d see with a human investment advisor.
  • Instant portfolio diversification: Because many robo-advisors focus on broad-based ETFs, you end up with exposure to a wide variety of investments at once. Plus, using the MPT approach gives you asset diversification based on your risk tolerance.
  • Start investing with a small amount of money: Many robo-advisors will let you open an account with no minimum balance requirement. Additionally, you might be able to invest a small amount of money, including using robo-advisors that allow you to invest pocket change. Traditional financial advisors, on the other hand, can have minimum investment requirements ranging into the hundreds of thousands of dollars.
  • Accessibility: Because you access robo-advisors online or through an app, you can manage your account at any time.

Cons

  • Harder to customize for specific needs: While it’s possible to get some customization, you might have a harder time tailoring a portfolio for specific needs. You won’t get the nuanced advice you’d get from a human investment advisor.
  • May not have access to as many services: When you work with a human advisor, you could get access to a wider variety of services, including wealth management, private banking, tax planning and other specific planning help. With a robo-advisor, the menu of services is generally much smaller.
  • Limited ability to trade individual stocks: Because robo-advisors generally construct your portfolio for you using ETFs, you aren’t usually able to trade individual stocks. If you want to day trade or buy specific shares of a company, you likely won’t have that flexibility with a robo-advisor. There are some hybrid brokers that offer robo-advising and access to individual stocks, but the stock choices are usually limited.
  • Limited human interaction: While some robo-advisors allow you to buy premium services that include human interaction, you’re largely limited when it comes to a personal touch. Many robo-advisors don’t have offices, and you might not be able to sit down face-to-face with someone. If that’s important to you, a robo-advisor might not meet your needs.

How to choose a robo-advisor

When choosing a robo-advisor, it’s important to consider your needs and financial goals Here are a few things to keep in mind.

Consider fees

In general, robo-advisor fees are based on your account size and charged as a percentage of your assets under management. There are some robo-advisors, however, that charge a flat monthly fee. If there are other services, like financial planning, you might pay an additional one-time fee for the session.

While there are some free robo-advisors, the average fee for a balance of $50,000 is 0.36%. This is much lower than the average fee of 1.17% seen with human investment advisors. Still, you’ll want to compare costs between robo-advisors to make sure you’re selecting the best option for your financial situation.

Make sure you meet the minimum investment requirement

Many robo-advisors don’t require a minimum investment. Often, you can open an account with $0 and then invest when it’s convenient. There are some robo-advisors that do have minimum balance requirements of $5,000 or more though, so it’s a good idea to check. Look for a robo-advisor whose minimum you can meet.

Also, be aware that some robo-advisors allow you to “unlock” certain premium services once your account balance reaches a certain amount. For example, with Betterment, once you have $100,000 in your account, you get access to a financial planner (although the management fee is higher). If you’re hoping to get more advanced and personalized help later, check to see if a growing balance allows you to gain access to these additional services.

Look at available account options

Depending on your situation, you might want different types of accounts. While most managed investment accounts offer individual and joint taxable accounts, you might also be looking for other types of accounts, like trusts. Alternatively, you might also want a robo-advisor Roth IRA or a SEP IRA. Some robo-advisors offer help with college savings and allow you to set up custodial accounts for your kids, too.

However, not all robo-advisors offer all possible account options. Before opening an account, review the types of accounts to make sure you’re getting what you want.

Review the investment selection and strategy

Many robo-advisors use their own investment algorithm based on the principles of MPT, which favors asset allocation over individual stock picks and holds that risk and reward are correlated. Additionally, many use different ETFs to construct portfolios. A robo ETF selection usually includes stocks, bonds and real estate investments.

Check the robo-advisor returns to see how different model portfolios perform. You can also get an idea of robo-advisor performance by looking at a prospectus from the different funds used. This will give you an idea of what to expect, even though past robo investing returns can’t predict future results.

Robo-advisor alternatives

Robo-advisor vs. index funds

An index fund allows you to own a small piece of each investment in the fund. To buy an index fund, you normally need to go through a brokerage. Depending on the brokerage, there might be a selection of index funds that don’t come with transaction fees. If you want to build your own portfolio, this can be one way to go about it. However, you still have to be aware of potential transaction fees and expense ratios.

With a robo-advisor, your portfolio is constructed for you, from a selection of ETFs the advisor favors. It’s important to note that, with ETFs, you don’t own the underlying assets. If you don’t mind a hands-off approach and don’t care if you pick your own funds, this can be a good choice.

When choosing your own index funds and managing your own investment account, you’re responsible for rebalancing and managing any tax strategy. With a robo-advisor, depending on the offered features, that can all be taken care of on your behalf.

Robo-advisor vs. financial advisor

With a robo-advisor, you can choose the general direction of your portfolio, in that it’s possible for you to adjust your asset allocation. However, you won’t be able to do a lot of serious customization, and you might not get personal attention. Portfolio decisions are largely handled by algorithms, whether it has to do with tax minimization or portfolio rebalancing.

On the other hand, a financial advisor can provide you with more tailored advice. They can look at your situation and provide guidance based on your unique circumstances. Plus, depending on the services they provide, you might get access to a wider variety of asset classes and investment choices. If you want more involvement from a financial advisor, going this route — instead of choosing a robo-advisor — may make more sense.

In the end, a robo-advisor can be a smart choice, especially for beginning investors. It can provide you with a low-cost way to start investing without the need for a lot of specialized knowledge. If you decide later that you need more help with financial planning, or if you learn enough to branch out into managing your own portfolio, you can always move your money and invest in a way that makes more sense to your changing situation.

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Investing

Form ADV: What You Need to Know

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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When researching investment advisors, one of the best tools at your disposal is Form ADV, paperwork that registered investment advisors must file with the Securities and Exchange Commission (SEC). The filing, which contains two parts, includes a vast amount of information about an advisory firm, including its services, client base, fee schedule and any disciplinary actions on its record.

Let’s take a look at Form ADV and how it can help you decide if an investment advisor is right for you.https://www.magnifymoney.com/blog/wp-admin/profile.php

What is Form ADV?

The Form ADV is officially called the Uniform Application for Investment Advisor Registration. The SEC requires this registration document from investment advisory firms (including robo-advisors) that manage at least $25 million in assets. Not only is filing Form ADV required to register with the SEC, but advisors must update their filing each year.

Advisors with less than $25 million under management are exempt from filing Form ADV. Instead, these firms can register with other regulatory authorities; however, if they want to be registered with the SEC, filing Form ADV is required.

In general, Form ADV filings can help investors gain information about who owns the company, the services the firm provides, what fees clients may pay and if there are any disciplinary actions against the firm, its affiliates or its employees. In other words, viewing a firm’s Form ADV is a way for you to evaluate a financial advisor to see if they are a good fit.

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What information you can find in Form ADV

Information in Form ADV is presented in two sections. Part 1 is a standardized fill-in-the blank form that contains information about the investment advisory business and how it operates, while Part 2 is basically a brochure that provides in plain language descriptions of the types of services offered, how much those services cost, the investing strategies used and the details of any disciplinary actions you need to be aware of.

Form ADV Part 1

Form ADV Part 1 offers information about the advisor in more of a list or check-box style format. You can easily see basic identifying items for the investment advisor, including:

  • Firm name
  • Office locations
  • Other contact information
  • Assets under management (AUM)
  • Total number of employees
  • Types of clients served by the firm
  • Fee types charged
  • Advisory services offered
  • Any other business activities, including real estate or accounting
  • Disciplinary and regulatory disclosures

All of this information can help you figure out the basics of an investment advisor. One of the most important sections of ADV Part 1 is the disclosures, which is always Item 11 in the document. This section provides information on whether an investment advisor, its affiliates or any of its employees has faced civil, regulatory or criminal charges over the last 10 years.

Form ADV Part 2

While the information in Part 1 is useful for an overview, what you find in the Form ADV brochure can be even more helpful as you seek to answer questions about a financial advisor. Rather than just providing information, the brochure provides context. The two major parts of Form ADV Part 2 are divided into “a” and “b” designations.

Form ADV Part 2a

This is the main Form ADV brochure. When you read this portion of the ADV, you’ll find information that includes:

  • How the business is run: You’ll get details on how the business operates, including who owns the firm and the types of services it provides.
  • Who the firm serves: The brochure will provide more information on the client types the firm is capable of serving, as well if it has a minimum investment requirement.
  • Fees and compensation: You’ll get greater detail on the fee structure for the advisory business in the brochure, including how it charges for specific services. You might even see published fee schedules detailing the exact rates the firm charges, though firms may also provide estimates.
  • How investments are chosen: The Form ADV brochure also includes information on the types of investments used and the strategies involved in putting together portfolios. The different analysis methods the advisor relies on are also detailed in Form ADV Part 2a so that you understand the way the advisor evaluates investment opportunities.
  • Risks involved: The brochure also requires investment advisors to spell out the risks of different investments and strategies it uses. If something is out of the ordinary and could increase your risk, that’s also shared in this section.
  • Ethics: Investment advisors are also required to describe a code of ethics and point out where a more detailed version can be found. In addition to providing this code, an advisor also uses the Form ADV brochure to describe any potential conflicts of interest it may have and how they deal with those conflicts.
  • Disciplinary disclosures: There is also a section for disciplinary disclosures in Form ADV Part 2, in addition to Part 1. The brochure may include more color on the events disclosed in Part 1. Information is considered “material” to clients if they happened within the past 10 years.
  • Brokerage practices: Finally, ADV Part 2 requires firms to provide information about the different practices a brokerage might engage in, such as using a third party for research or bundling trades together to reduce costs.

Form ADV Part 2b

In addition to Part 2a, there is also a Form ADV Part 2b, which is known as the “brochure supplement.” Clients can get an idea of who is managing their investments and providing advice for their portfolios.

Some of the information you find in Form ADV Part 2b includes:

  • Advisors’ backgrounds: You can get information about an individual advisor’s background and experience, including their post-secondary education and any business experience they’ve had in the last five years.
  • Employee supervision: If you’re dealing with an individual team member, the investment advisory firm must detail the supervision methods used and how the advisor is monitored.
  • Business activities: If there are business activities the advisor is involved with, along with associated conflicts of interest, those must be disclosed. Different compensation structures, such as special commissions or performance bonuses, are also disclosed in this portion of the Form ADV.
  • Additional compensation: There might be other types of compensation received by individuals, such as a sales award, that can provide benefit to the advisor for the services they offer. This is included in Form ADV Part 2b.
  • Disciplinary disclosures: Once again, disciplinary action and legal actions specific to an individual must be disclosed.

How to access Form ADV filings

Most firms include a link to their Form ADV on their websites. However, if you don’t see it there, you can find it using the SEC ADV search. Follow these steps to access a firm’s filing:

    • Visit the Investment Adviser Public Disclosure (IAPD) website: The IAPD website serves as a database of investment advisors in the United States. It functions as the SEC investment advisor search.
    • Form ADV search: Once you’re on the IAPD website, go to the search bar at the top and enter the name of a firm. You can also search by city or zip code. If you know the advisor’s Central Registration Depository (CRD) number, you can use that as well. The CRD is maintained by the Financial Industry Regulatory Authority (FINRA) and assigned to those in the database as an easy way to search for advisors and firms.
    • Select “More Details”: Once you get your search results, you can click for more details on an individual firm. On the firm’s summary page, you can view information about the firm’s registration status or click the tabs at the top to view its Form ADV Part 1 or 2.

In addition to the SEC search tool, it’s also possible to get more information on a firm or advisor by visiting the FINRA BrokerCheck website, which also provides details about disciplinary disclosures.

Using Form ADV in your search for a financial advisor

If you have questions about how a financial advisor or investment firm operates, Form ADV can be a big help. The paperwork collects important information about the firm or advisor in one place, assisting with your research and comparison-shopping process as you look for an advisor who is right for you.

For example, you can see which kinds of clients the advisory firm focuses on serving, and whether you might meet minimum investment requirements. Additionally, the ADV fees section can help you get a feel for how an advisor charges for their services, such as if they are fee-only or fee-based. This way, you’ll know before you start working with an advisor if they have any potential conflicts of interest or may be financially incentivized to recommend certain products. Having this information on hand can help you to act as a more discerning investor.

It’s also important to know whether the firm or advisor has any disciplinary disclosures and what the nature of those disclosures is. If you notice flagrant issues or repeat problems, that might be a sign that you don’t want to work with a firm. Many firm websites won’t go into details about that information in a highly visible place, so it’s important to look at the ADV form.

Of course, Form ADV should only be one way in which you evaluate an advisor. Also make sure to ask plenty of questions and gauge if you think the advisor is someone you could see yourself working with.

Form ADV FAQ

Investment advisors who want to register with the SEC and state authorities can file the Form ADV to share important information. Those that manage at least $25 million in assets are required to file the ADV.

Firms must update Form ADV each year. They are required to file an amendment to update within 90 days from the close of their fiscal year.

The CRD maintained by FINRA and the number associated with it can be used to find various records about a registered investment advisor. You can look up an advisor’s CRD number on the FINRA website, using BrokerCheck. Then, it’s possible to use the CRD number to search on the IADP website to find the relevant Form ADV.

This is the rule under the Advisers Act that requires an advisor registered with the SEC to produce a brochure that describes the business and its practices, as well as disclose conflicts of interest and disciplinary issues. For the most part, clients are supposed to receive the disclosure at least once, and then annually if there have been major changes. You can find an advisor’s brochure in ADV Part 2.

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How to Invest in Oil: What You Need to Know

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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From mutual funds to master limited partnerships, there are a number of ways to invest in oil, and potentially make money while diversifying your portfolio. Oil is one of the most popular commodities in the world. But while chances are you know the cost of oil impacts the price you pay at the gas pump, what if you could take a more direct approach to profiting from oil? Read our review to learn everything you need to know about investing in oil.

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4 ways to invest in oil

Invest in an oil ETF or mutual fund

Among the easiest ways to invest in oil is through an oil exchange-traded fund (ETF) or mutual fund. Funds offer exposure to a variety of investments at once, and an oil ETF or mutual fund focuses on companies and other assets that are connected to oil. This might include ETFs and funds that focus on exploration, production and delivery — and everything in between.

With a mutual fund, you get instant diversity and own a piece of each company in the mutual fund. With an oil ETF, on the other hand, you might be exposed to other assets, such as a collection of oil futures. You might even be able to invest in a short oil ETF that assumes that oil prices will fall, or a crude oil ETF that focuses more on how various wells and related concerns are performing. Realize, though, that an ETF doesn’t invest directly in the underlying assets.

Funds can be the simplest choices, since there’s a good chance you already understand how a mutual fund works, and ETFs are traded like stocks on the market. For those interested in long-term investing, and want a simple way to gain exposure to the oil market and add a little more diversity to the portfolio, oil ETFs and mutual funds can be one way to make it work.

Invest in crude oil futures and options

You can also invest in oil by focusing on oil futures and options. Investing in crude oil futures or heating oil futures can provide you with a more direct way to invest in oil.

When you use futures or options, you’re essentially betting on how the price will fare, or you’re taking the opportunity to get access to oil at a lower price in the hopes you’ll be able to sell it later at a higher one. With options, there’s also the ability to short oil prices and come out ahead if the oil price drops.

In either case, though, it’s important to take extra time to learn about what you’re doing and make sure you fully understand the risks involved. Learn how to read an oil futures chart and follow crude oil futures news. The way you trade futures and options is different from using the stock market or a mutual fund, so you need to understand the platform. Successful oil futures traders spend a lot of time learning and following trends and news, whether they specialize in West Texas Intermediate (WTI) or Brent crude.

If you’re approved through your brokerage to trade oil futures or options, though, you can trade on margin, using leverage to multiply your position, and magnify your gains. But watch out — leverage can also magnify your losses, so it’s important to only risk money you can afford to lose.

Invest in oil stocks

Another way to experience a little more direct investment in oil is to focus on oil stocks. If you want to own individual stocks, rather than funds, you can learn how to invest in oil stocks fairly easily.

With the right expertise, you can identify the companies likely to be the biggest winners in the industry while avoiding some of the less-profitable ones. This can be an advantage because oil company profits are tied to the price of oil. As the price of oil rises, company profits go up.

Big oil companies are called supermajors, and they integrate different businesses up and down the supply chain, from those that extract the oil from wells or oil sands to those that process it to make various oil-based products, including gasoline. When the economy is doing well and demand for oil is up, these supermajors — think ExxonMobile (XOM) or Chevron (CVX) — generally do well. They are also major blue chip oil stocks. However, with a little digging, you can find success with smaller oil companies as well.

Invest in oil master-limited partnerships (MLPs)

A master-limited partnership (MLP) is a type of business that trades publicly on an exchange like a stock. Usually, these partnerships are designed to provide growth to investors by holding properties like pipelines, oil exploration sites and other resource-related assets.

In general, MLPs can make cash payouts — which is why they can be so popular with investors. However, it’s important to note that the partnership nature of an MLP means it has different tax considerations than what you’d see with more traditional stocks. Before investing in an MLP, consider consulting with a tax professional.

Understanding oil market fundamentals

In addition to knowing how companies fit into the supply chain, it’s also helpful to understand oil market fundamentals. Here are some of the things to keep in mind as you learn about the oil market and as you put together your own investing plan.

Oil market supply and demand

One of the basic principles of our economic system is that of supply and demand. Understanding this in the oil market is essential to success as an oil investor.

In general, economic growth tends to lead to greater demand in the market. As demand grows, the price of oil increases, and this increase in price brings greater revenues to companies involved in the oil supply chain. Indeed, even the anticipation of increased demand — such as in the months leading up to the summer travel season starting Memorial Day weekend — can lead to a bump in prices.

Supply also plays its part. When supply increases, it can actually lead to a decrease in price. If there’s more oil on the market than is needed by demand, prices have to drop in order to encourage others to buy the excess supply.

On the flip side, supply disruptions can boost prices. A war in a key oil production area, or an event that interrupts the pipeline, can reduce the availability of oil on the market. When oil can’t make it to market, its presumed scarcity drives prices up. With supply unable to meet demand, those willing to pay more get access to the resource.

As an oil investor, you’ll need to be aware of the forces that can impact oil market supply and demand and take them into account when making your oil investing choices. Some additional factors to keep in mind include:

  • Geopolitics: Trade deals can impact supply and demand. Additionally, situations that can affect a major country’s economy can also create changes to oil prices. If a major oil buyer like the U.S. or China experiences an economic disruption, demand can drop — and so can oil prices.
  • Currency: It’s important to note that oil prices are expressed in U.S. dollars. So, if oil prices rise, it can cause a problem in countries that don’t use the dollar or that have currencies that are relatively weak in comparison to the dollar. On the other hand, if the dollar weakens relative to other currencies, it can make oil cheaper in those countries.
  • Speculation: Don’t forget about speculation. If investors feel like they should buy at a certain time, or make decisions based on what they think will happen, it can spill over into real impacts on the oil market.

How OPEC impacts oil investing

One of the biggest influences in the global oil market is the Organization of Petroleum Exporting Countries (OPEC). This 14-member association exists mainly to control the production of oil in a way that maximizes member profits.

OPEC is mainly concerned with controlling production in a way that keeps oil prices at a supportive level. However, it’s important to note that the members of OPEC also recognize that prices that get too high might prompt more investment in alternative energy sources — so the idea is to keep oil prices in a sweet spot that provides profitability, but also doesn’t push consumers and countries to develop alternatives to oil.

Sometimes, though, OPEC members don’t always agree on a course of action. In early 2020, for example, members Russia and Saudi Arabia had a disagreement over production, causing more oil to flood the market and prices to drop precipitously. This disagreement happened at a time of decreasing demand, due to stay-at-home orders issued in response to the COVID-19 pandemic, which further complicated matters and impacted crude oil prices.

Upstream, midstream and downstream oil companies

When learning how to invest in oil, it’s also important to understand the differences between upstream, midstream and downstream oil companies and how they operate. These companies are all part of the oil supply chain and knowing what they do can help you make more informed decisions about how to invest in oil.

  • Upstream: This is the beginning of the oil supply chain. These are companies that focus on exploration and production, and the activities involved include geologic surveys to find oil, drilling and the extraction of oil from wells or oil sands.
  • Midstream: Midstream oil companies (often MLPs) are usually connected to the transportation and storage of crude oil. Often, these actions involve using pipelines, tanker trucks and rail cars to move and store oil.
  • Downstream: Companies involved in downstream operations are related to turning crude oil into the products that consumers use regularly. Fuel, asphalt, heating oil and more are all part of downstream companies.

How to get started with investing in oil

You might be surprised at how easy it is to invest in oil. You can decide how you want to make your investing decisions: choosing a less risky mode of investment, such as oil ETFs and mutual funds or the individual stocks of supermajors, or taking a little more risk with oil futures and options or MLPs.

Investors looking to participate in oil must carefully consider what they’re looking for:

  • If you’re looking for long-term gains, investing in the stocks of well-run oil-producing companies or funds holding those companies can create attractive long-term gains. Some of the market’s largest businesses — Exxon Mobil and Chevron — are oil companies, and so are some of the market’s highest dividend payers.
  • If you’re looking for short-term trading profits, oil futures and funds owning oil directly will be what you’ll turn to. While the price of oil may go up over time, it doesn’t create the kind of buy-and-hold returns you can earn with companies. Instead, the price fluctuates a lot, meaning you’ll need to trade your way to wealth.

You can invest either directly through a broker or open an online brokerage account.

Regardless of which route you take to start investing in oil, it’s imperative that you do your research ahead of time and understand the risks involved. You should also make sure that oil investing fits with your overall goals, as well as adds to your portfolio, before you get started.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.