How to trade oil to an individual
Despite the active promotion of the policy of alternative energy sources, oil does not give up its position and remains one of the most popular types of fuel. Its popularity is so great that not only major financial market players, but also individuals earn money from it. You can buy and trade oil through options, futures, contracts.
What kind of oil to trade
Many countries of most continents are engaged in the extraction of “black gold”, so there are more than 200 varieties of oil alone. Each product entering the world market has its own characteristics, and the following brands are considered the most popular:
- WTI is a grade of oil produced in the state of Texas of the United States of America;
- Urals – Russian mixture produced in Siberia, the Urals and the Volga region;
- Brent – a mixture of varieties from the offshore fields of the North Sea.
How to make money on oil
The user can buy oil and make money on it in several ways, each has its own characteristics. To start, you will need initial capital and a certain set of knowledge. Previously acquired skills in using trading instruments or investing can be a good help.
Traditionally, capital holders who expect to earn money by investing in various types of investment products, including raw materials, use the following ways to make a profit:
- Trading or, more simply, stock trading. This method is aimed at generating income in the short term due to the price difference.
- Investment, which involves investing money in the acquisition of assets for a long time, allowing you to save and increase capital.
Is it worth investing in oil
We will immediately exclude investing from the possible list. Oil is not used as an investment product, since, unlike, for example, stocks, it cannot act as a means of saving or increasing income. Simply put, you can’t invest in barrels with raw materials. And besides, its value is too sensitive to market conditions and does not have a stable growth trend in the long term. For example, if in a decade most countries switch to other energy sources, the price of oil will drop significantly.
If we talk about investing in oil, it is more profitable to buy shares of oil companies. In this case, you can receive passive income in the form of dividends or earn on the difference in price. The cost of raw materials is influenced by many factors, including:
- production volume;
- development of new deposits;
- the direction of foreign policy.
Each of these factors can provoke an increase in the value of shares of a particular company and as a result bring their holder a good profit.
Binary Options Trading
The essence of this method boils down to the fact that the trader bets on the growth or decline of the price in the short term. If the forecast is justified, the trader makes a profit, if not, loses the invested funds.
With a successful combination of circumstances, you can earn even by losing a bet. For example, some brokers, in case of loss, pay compensation to traders up to 10-20% of the bet amount. However, it is important to remember here that outright scammers are often found in the field of binary options, so inexperienced traders often lose their invested funds and abandon this idea forever.
This option of oil trading involves the conclusion of futures transactions, most of which are pure speculation or, in more understandable language, betting. One of the parties to the futures contract undertakes to sell an asset to the other party in the future, but at today’s price. At the same time, each of the parties bets that the asset price will rise or fall in the future. Depending on whether the forecast is justified in the future, one of the parties makes a profit, while the other remains at a loss.
It is noteworthy that after the expiration of the contract, calculations are carried out automatically, so it is impossible to influence the result. In Russia, futures contracts are traded on the Moscow Stock Exchange, where oil is represented by Brent and WTI grades.
CFD or contacts for the difference
This instrument of the futures market is a futures surrogate that allows, with a more modest capital, to conclude transactions by analogy with futures, but in a smaller volume. As in the previous case, the basis of the transaction is a bet on the difference in the price of the asset in the future without the need to own the asset itself. Settlements between the parties to the transaction are carried out after expiration (expiration of the contract) with the following result:
- the seller of the asset pays the difference in price to the buyer if by the time of expiration the price is higher than the futures (contractual, which is fixed in the contract);
- both sides remain at their own if the price does not change over time;
- the buyer incurs losses, and the seller receives income if the value of the asset falls.
How to trade oil
The algorithm of oil trading does not involve the purchase of raw materials directly. First you need to decide on your status. Will you be an investor, and then it is advisable to invest money in shares of oil companies, or a trader who makes a profit through the conclusion of CFDs or futures contracts.
It is important to understand that quick earnings due to price speculation are always a risk. But with a competent approach, it can give good results in the form of profit.
Oil trading to individuals is carried out according to the following algorithm:
- Choosing a bona fide broker. At this stage, it is important to pay close attention to the availability of a license and the amount of the commission fee for the transactions being made.
- Downloading a trading terminal, registering and opening a deposit. It will already require real money needed to acquire assets.
- The choice of a market instrument (futures, CFDs, stocks, etc.) and a trading platform. Oil trading is carried out on the Moscow Stock Exchange, some foreign platforms and, of course, on FOREX.
- Purchase of an asset online. After the acquisition, it will remain to wait for the result that will follow in the short or long term.
Pros and cons of oil trading
The advantages of choosing this type of raw material as an asset are the following:
- Volatility, which means the ability of an asset to fluctuate over a short period of time. In the case of oil, frequent changes in its price allows you to get a high income.
- Good liquidity, assuming a quick sale of the asset. This feature is due to the daily execution of millions of oil transactions on the exchanges.
There are also disadvantages that it is important to take into account when investing in oil, these are:
- A large number of factors affecting the cost of raw materials, some of which are difficult to predict.
- A narrow price corridor within which the price of oil fluctuates. This feature makes oil not an attractive asset for those who are used to making money on long-term investments.
- Inability to influence the result. When entering into a futures or CFD contract, you need to understand that, firstly, you will not be able to refuse obligations, and secondly, you cannot postpone the period of its execution. And this is the main risk. Unlike a contract, shares can generate passive income, and, in addition, they can be sold when the price goes up.
When choosing oil, there are not so many profit-making options and, as a raw material, it is not suitable for investment. The best thing that can be offered to investors who are used to earning income in the long term is buying shares of oil companies. As for trading, the rules are the same as when working with other assets: studying analytics and market movements, mandatory diversification.
Published: 13 October, 2021