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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 has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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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.

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.

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Capital Gains Tax Rate and Rules 2020

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 has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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As an investor, the goal is to improve the performance of your portfolio and make money through capital gains. However, when you see gains from your investments, the United States government expects to get its cut in the form of taxes, known as capital gains tax. Here’s what you need to know about the capital gains tax rate and when you’re expected to pay.

Capital gains tax rates 2020

In general, capital gains (or losses) are realized when you sell an investment. Short-term capital gains are those that come from the sale of investments that you’ve held for a year or less. These gains are considered part of your income and taxed at your marginal tax rate.

Long-term capital gains, on the other hand, are realized on investments that you’ve held for more than a year. If you bought an asset a year and a day ago, you can access a favorable capital gains tax rate. Here are the federal capital gains tax rates for 2020:

2020 Long-Term Capital Gains Tax Rates for Single Filers

Long-term capital gains rateIncome

2020 Long-Term Capital Gains Tax Rates for Those Married, Filing Jointly

Long-term capital gains rateIncome

2020 Long-Term Capital Gains Tax Rates for Those Married, Filing Separately

Long-term capital gains rateIncome

2020 Long-Term Capital Gains Tax Rates for Head of Household

Long-term capital gains rateIncome

As you may have noted from looking at the above tax brackets, even at the highest capital gains tax rate, it’s likely that you’ll still pay less on your investment gains than you do on your regular earned income. That’s because capital gains tax brackets are designed to reward those who invest for the longer term.

What counts as a capital gain?

A capital gain is what’s realized on an asset that increases in value. With a stock, your capital gains are realized when you sell a share for more than you bought it for. The same is true of an asset like real estate. If you sell a piece of property for more than your purchase price, the difference is your gain.

Basically, you used your money (your capital) to buy an asset. When that asset becomes worth more, and you sell it for a higher price, you receive more capital (money). If you held that asset for more than a year, you’ll see long-term versus short-term capital gains.

How to calculate capital gains taxes

Calculating your federal capital gains tax is fairly straightforward. In essence, it consists of these three steps:

  • Figure out how long you’ve held the asset: Your first step is to figure out how long you’ve had your investment. If you bought it less than a year ago, it’s going to be a short-term capital gain, and you’ll just pay taxes on it at your regular income tax rate.
  • Use the tax table to see how much you’ll owe: If you’ve had the asset for more than a year, you can use a tax table to see how much you’ll owe, based on your income.
  • Multiply your rate by your gain: If you had a gain of $3,000 and you’re in the 15% bracket for long-term capital gains taxes, you simply multiply those together and your tax payment is $450.

In addition to these simple steps, though, there are a few other things you’ll need to consider as you figure out your tax requirement:

Keep cost basis in mind

Your gain is based on the cost basis of an investment. For example, if you buy 10 shares of stock at $100 a piece, you’re paying $1,000. However, if you pay a $7 trading commission on the transaction, that’s added in, bringing your actual cost basis to $1,007.

More than a year later, let’s say you decide to sell all of your shares for $1,500. By this time, though, your broker now offers fee-free trading, so you don’t have to pay a commission. All you have to do is subtract your cost basis, $1,007, from your total sale of $1,500. The result is a gain of $493. That’s the amount you’ll be taxed on, as your capital gains tax is only levied on what you actually made on the transaction.

Use the first in, first out rule

If you’re using a robo-advisor or broker and decide to sell some assets, you might want to make sure that you’re selling your older shares first. There’s a decent chance you won’t sell everything at once. Instead, you might be trying to liquidate a few shares to meet a specific goal. The good news is that most brokers and robo-advisors will automatically sell your oldest shares first. When opening an account, you might be asked if you want to use the first in, first out method when deciding which shares to sell and this can be a good plan.

At the end of the year, when sending your tax information, your broker will provide you with your cost basis and gains — and let you know whether they’re long-term versus short-term capital gains. This can help you keep track of the situation.

Remember you can offset capital gains with losses

Realize, too, that you can offset your capital gains with capital losses. If you lose money on investments, that amount can be used to reduce your gains. For example, let’s say you had a gain of $493. However, you had a different investment that you sold at a loss of $800. You can take that $800 loss and use it to offset your $493 gain. Now, instead of owing taxes on $493, you have a loss of $307 that can be deducted from your income.

When calculating your capital gains taxes, you should start by using short-term losses to offset short-term gains, and match long-term losses with long-term gains. Then, taxes are figured on any gains you have, based on whether they’re short-term or long-term.

Be aware of common exceptions for federal capital gains tax

There are some exceptions to keep in mind, depending on the asset. Two common capital gains tax items to be aware of include:

  • Collectibles: Collectibles, art and certain coins are taxed at ordinary income rates up to 28%, regardless of how long you’ve held them.
  • Primary residence: If you have a primary residence and you meet certain conditions (like living in the property for at least two of the last five years before the sale), you can exclude up to $500,000 of your gains from taxes if you’re married and $250,000 if you’re single.

5 strategies to minimize capital gains taxes

When preparing to sell investments, it’s a good idea to know how to reduce your tax bill. Here are some strategies that investors can use to minimize the capital gains tax rate.

1. Don’t sell

You don’t actually pay taxes on your capital gains until you realize them by selling the asset. So, if you can hold off selling, you can reduce your tax bill.

Consider using a strategy that allows you to invest in assets that have long-term staying power, like a strong individual stock or an index fund that reflects broader market trends. If you can invest in a way that allows you to put off selling until you’re ready to accomplish a specific goal, you can reduce the taxes you pay. This is especially true if you can hold off until you’ll be in a lower tax bracket.

2. Invest in tax-advantaged vehicles

You can shelter some of your capital gains from taxes with the help of tax-advantaged accounts. If you have a retirement account, you can sell assets in the account and buy different assets without worrying about capital gains. Later, when you withdraw money from your traditional 401(k) or IRA, you pay taxes on the withdrawals at your regular income tax rate.

If you use a tax-advantaged vehicle like a Roth account, though, you can avoid paying capital gains taxes at all. With a Roth account, you make contributions with after-tax money, but all of your gains grow tax-free. When you withdraw during retirement, you don’t pay taxes on the money.

You can also use a similar strategy with a Health Savings Account (HSA). If you qualify, you can put money into an HSA and invest it. As long as the money is used for eligible healthcare costs, you can withdraw the money tax-free and you won’t have to pay capital gains taxes.

3. Use a tax-matching strategy

When you know you’re going to have a gain that’s taxable, you can offset it by selling a losing investment. Whether you’re rebalancing or hoping to cut losses on an asset that keeps dropping in value, you can take advantage of that loss through a process called tax loss harvesting. You sell at a loss and then use that loss to offset some of your gains.

You reduce the size of your gains with this strategy, and also reduce the capital gains taxes you pay. It’s also possible to use up to $3,000 in excess losses as a deduction against your regular income and carry forward any remaining losses to another year.

4. Donate appreciated property to charity

Rather than cashing out an investment, consider donating it to charity. The charity gets a valuable asset, and you can claim a tax deduction for the value of the asset. It’s treated like a cash donation for tax deduction purposes, and you don’t end up paying taxes on the gain. Plus, you still have the cash you would have donated.

5. Strategically balance gains and losses

Rather than planning on carrying losses into the next year, or waiting until tax time to benefit, you can balance your gains and losses by selling some securities at a loss and some at a gain, based on your needs. If you want to unload a losing stock, you can do so, and instead of waiting until tax time to claim the deduction, look for a profitable stock you planned to sell anyway. Now you have the cash available, and you won’t have to pay a capital gains tax.

By paying attention to the tax impact of your investment transactions, you can make better choices and reduce the amount you pay in federal capital gains tax.

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.

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Review of McAdam Financial

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 has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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McAdam Financial is a registered investment advisor based in Philadelphia, with additional locations in Chicago, Boston and Tyson’s Corner, Va. The firm, which has roughly $600 million in assets under management (AUM), focuses mainly on financial planning and consulting services. It primarily serves individual investors, with high net worth individuals comprising a small portion of its current client base.

All information included in this profile is accurate as of April 21, 2020. For more information, please consult McAdam Financial’s website.

Assets under management: $600,043,647
Minimum investment: No stated minimum
Fee structure: A percentage of AUM, up to 2.50% annually, for investment management; either a fixed fee or a percentage of AUM up to 2% for financial planning or consulting
Headquarters: 1880 John F Kennedy Blvd., 16th Floor
Philadelphia, PA 19103
(888) 614-5323

Overview of McAdam Financial

Formed in 2014, McAdam Financial is privately owned by its founder, Michael McAdam, who also serves as CEO of the company. In the past, he worked at American Express Financial Advisors (currently known as Ameriprise Financial) and has been named a 2018 Innovator and Entrepreneur Award Winner by CEO Report.

The firm has about 140 employees, 123 of whom are involved with advisory functions. In 2019, the company was recognized by Advisory HQ as a top financial advisor in Philadelphia, where it is headquartered.

What types of clients does McAdam Financial serve?

Most of the clients served by McAdam Financial are individuals. Nearly 2,700 of its clients are classified as individuals, with just over 100 classified as high net worth individuals. For reference, the SEC defines a high net worth individual as someone with at least $750,000 under management or a net worth of at least $1.5 million.

The firm does serve some other clients, like businesses and profit-sharing plans, but it currently works with fewer than five of each of these client types.

McAdam Financial has no stated minimum that clients must meet in order to begin working with the firm . However, certain unaffiliated independent investment managers that the firm works with may impose their own minimums.

Services offered by McAdam Financial

McAdam Financial offers a variety of financial planning and consulting services aimed at individuals and families. These can be offered as standalone products or in conjunction with wealth or investment management services. The scope of the services will depend on a client’s individual needs and the agreement.

When it comes to investment management, McAdam Financial offers both discretionary and non-discretionary services. Most accounts are managed on a discretionary basis, which means the portfolio manager can make decisions without first consulting the client. However, the firm does offer management on a non-discretionary basis, which means the advisor needs to get the client’s permission before making changes. The firm refers to its selection of available services as “Financially Advanced,” due to their customizable nature.

Here is a full list of services the firm offers:

  • Investment management services
  • Financial planning and consulting services
    • Business planning
    • Cash flow forecasting
    • Trust and estate planning
    • Financial reporting
    • Investment consulting
    • Insurance planning
    • Retirement planning
    • Risk management
    • Charitable giving
    • Distribution planning
    • Tax planning
    • Manager due diligence

How McAdam Financial invests your money

McAdam Financial customizes portfolios according to a client’s needs. In deciding on how to allocate client assets, the firm looks specifically at a client’s risk tolerance, time horizon and goals.

McAdam Financial does use their own proprietary asset allocation models in some cases, but those aren’t disclosed. For the most part, McAdam Financial allocates client assets among exchange-traded funds (ETFs) and mutual funds. Additionally, depending on a client’s investment objectives, it may also use individual debt and equity securities, as well as independent managers, privately placed collective investment vehicles and REITs on a limited basis.

When analyzing portfolios and making investment decisions and suggestions to clients, McAdam Financial uses fundamental analysis. With this method of analysis, an advisor looks at the underlying conditions of a fund or a fund issuer. Some of the factors that are considered as part of fundamental analysis include:

  • The issuer’s management team
  • Fund investment strategies
  • Reputation of the fund or the management firm
  • Past performance
  • How the fund has performed relative to other funds in similar classes

Once an asset allocation is determined and a portfolio is built, the firm reviews the client’s account regularly as needed.

Fees McAdam Financial charges for its services

McAdam Financial charges either a fixed fee or a fee based on a percentage of assets under management for its financial planning and consulting services. While these fees are negotiable, rates for asset-based fees generally range up to 2% of net worth or assets annually. They also charge fixed fees from $500 to $25,000 for certain services. Exact rates are determined based on the types of services used and the complexity of the client’s needs.

The firm charges for its investment management services based on a percentage of assets under management, with fees ranging up to 2.50% annually; this fee is also negotiable. In addition to this asset-based fee, clients may incur other costs, including:

  • Transaction fees
  • Short-term redemption fees
  • Mutual fund fees
  • Brokerage fees and commission fees for certain arrangements
  • Orion administrative fee ($45 per year)

These fees might vary based on the custodian and the assets or securities used. Additionally, the firm may offset investment advisory fees based on the amount paid for financial planning or consulting services.

McAdam Financial’s highlights

  • No minimum: Because this firm has no minimum requirement for assets under management, it has a low barrier to entry. This means that more individuals might be able to access its financial planning and investment management services.
  • Simple approach: With an emphasis on fundamental analysis and asset allocation with ETFs and mutual funds, McAdam offers a simple approach many people can understand.
  • Flexible plans: McAdam offers flexibility in its approach. The negotiable fees for various services, as well as the firm’s wide range of service offerings, make it possible to tailor a plan to your needs.
  • No disciplinary disclosures: The firm has a clean disciplinary record. See more details below.

McAdam Financial’s downsides

  • No set fee schedules: Unlike other firms, which may publish a set fee schedule, you won’t know your rate at McAdam Financial until you engage with the firm. The firm does have set caps on fees, though, and it is open to negotiation on rates. Still, this lack of transparency may make price comparison shopping more difficult.
  • Limited investment choices: For those interested in private equity or alternative investments, you might not be able to readily access these assets through McAdam Financial. While it’s possible to access some vehicles like private equity funds and hedge funds, the firm reserves these recommendations for certain investors and notes managers have “broad discretion” in selecting the investments.
  • Potential conflict of interest: Some of the firm’s advisors might also represent insurance agencies or broker-dealers. As a result, there could be a potential conflict of interest, since advisors might be financially incentivized to steer you toward products from which they receive commissions.

McAdam Financial disciplinary disclosures

McAdam Financial has no disciplinary disclosures to report. Because the firm is registered with the SEC, it is required to report material facts about any legal, civil or regulatory actions against the firm, its employees or its affiliates that would be material to clients. The firm reports no such incidents in its Form ADV, paperwork that registered firms must file with the SEC.

McAdam Financial onboarding process

McAdam Financial offers a complimentary consultation to clients before they sign up. You can schedule this consultation by calling 888-614-5323 or by sending an email to [email protected].

If you decide to use McAdam Financial, you’ll have an initial interview where the firm will get an idea of what you hope to accomplish with your money. Once that’s done, you’ll receive a tailored plan. You’ll get regular notice of any changes regarding your account, and can expect contact with your advisor at least annually to see if changes need to be made.

Is McAdam Financial right for you?

With no investment minimum requirement, McAdam may be an accessible choice, particularly for investors near its four offices in Philadelphia, Boston, Chicago and Tyson’s Corner, Va. The firm offers investment management services, as well as a range of financial planning and consulting services, making this a one-stop shop for both financial planning and money management.

However, prospective clients should note that the firm does earn commissions from selling products, which could pose a potential conflict of interest. As is the case when making any financial decision, it’s important to ask questions and make sure you understand the fees you’re paying to ensure you’re making the best decision for your money.

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.