What You Need to Know About Investing in Energy Stocks

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What You Need to Know About Investing in Energy Stocks

Over the last few years and throughout our history, the energy sector has always been one that has been involved in our society but has always been volatile and filled with uncertainty, but then again, so has every sector.

Our economy is unpredictable in many ways, but what we do know is that energy requirements will always be needed, and with the population always growing worldwide, it’s showing no signs of slowing down.

With it being a timeless part of our daily lives, we’re going to give you the full breakdown of what you need to know about investing in energy stocks so you can make an individual decision about whether it’s something that suits you or not.

 

What Are Energy Stocks?

In short, energy stocks are all of the companies, funds, ETFs, and other types of investments in the energy sector that you can invest in through the stock market. Whether this is oil, gas, renewable energy, or more, energy stocks allow you to own a piece of a company or companies through an investment platform or directly through the company.

These energy companies that people are investing in will focus on businesses that are producing and supplying energy for our day-to-day needs through fossil fuels and/or renewable energy.

 

The Different Types of Energy Stocks

This is quite a broad field to explore, so to best help you understand what you can invest in and the types of energy investments you can purchase, we’ll look at it in two sections:

 

The Different Types of Energy

  1. Renewable energy sources (clean energy stocks): Wind and solar energy, geothermal power, hydropower, biomass energy, and hydroelectric power.
  2. Non-renewable energy sources (traditional energy stocks): Gasoline, coal, petrol, diesel, oil and natural gas.

 

The Different Ways to Invest in These Energy Sources

  1. An individual stock on an investment platform
  2. An ETF through an investment platform
  3. An energy sector fund (mutual or energy index) through an investment platform
  4. Investing in the company directly
  5. Using spread bets or CFDs

 

The Role of Energy Stocks

The role of the entire energy sector and stocks is vital for our day-to-day lives. From turning lights on in our houses when we need to see and heating our buildings to fueling our transportation, we wouldn’t be able to live without it.

As of right now (July 2024), non, and renewable energy stocks take up just over 4% of the S&P 500 index (the most popular index in the world—the top 500 companies in the US). On top of that, since 2009, according to Novel Investor, the energy sector in the S&P 500 has on average returned a positive 6.70%.

There’s no doubt of the importance of the energy sector in our future, especially with the rise of renewable energy, but is it something you should invest in? We’ll run through that later.

 

Advantages and Disadvantages of Investing in Energy Stocks

Like any investment you make, there will be advantages and disadvantages, but determining whether the advantages for you personally outweigh the disadvantages is what you need to extrapolate from this. Here are the benefits and drawbacks of investing in energy stocks:

Benefits Drawbacks
The renewable energy sector seems to be growing year-on-year If you invest in a singular company and they go bust, you’re going to lose all your investments
Due to renewable energy, the global economy has a target to reach net zero by 2050, meaning the demand for renewable energy is higher Investing in one company or sector is risky if the sector crashes
We will always need energy; it’s a timeless necessity Just investing in energy will not provide you with a diversified portfolio
Many energy companies offer attractive dividend yields There are some environmental concerns (with the non-renewable energy sources)
This sector can potentially hedge against inflation due to energy prices seemingly rising during a high level of economic activity. There may be some regulatory risks, with policies impacting the operations and profit of energy companies

 

Should You Invest in Energy Stocks?

Whether or not you should invest in energy stocks depends on multiple factors, such as your risk tolerance, passion for the energy industry, and your motives behind the investment. If you’re investing in the energy sector because you believe that renewable energy will have a great impact on our future, then it may be a good investment for you.

Yet, if you’re investing in energy stocks purely for the belief that you’re going to be profitable, the volatility of each company or the sector as a whole is pretty high. Not to say that it can’t be profitable, by the way, because it does have great potential, but putting all your eggs into one basket, whether that be a stock or a fund, will not give you diversification.

Whether or not you should invest also depends on your goals. If you’re thinking about energy short-term, then maybe it could be a good investment or not, who knows? However, if you’re thinking about investing long-term, a more diversified portfolio will be required to ensure your investments are safer and have a greater chance of growth.

 

How to Invest in Energy Stocks

If you‘ve come to the conclusion that you want to invest in energy stocks and have that sector in your portfolio, here’s how you could add it to your investments:

  1. Do your own research on the energy sector
  2. Decide what type of investment you want (stock, ETF, index fund, etc)
  3. Open up an investment account on a popular brokerage (Vanguard, Hargreaves
  4. Landsdown, etc)
  5. Search for the stock, ETF, index fund, etc., on the investment platform
  6. Select it and decide how much you want to invest in it
  7. Deal it
  8. Now you have shares and own a portion of the company or sector as a whole!

Note: Each platform will look a little bit different, but this is the general premise of how you can invest in the company or fund you desire to get into. It may take a little bit of research on the platform to learn how to invest your money in it!

 

In Roundup

As you can see, the energy sector is not an investment that suits everyone, but if you’re a big believer in the industry and believe it’s going to do good for our world, then only you can make that decision.

However, if you’re looking to be a long-term investor and want to get into this sector, we recommend you diversify your portfolio and invest in other sectors, or funds that cover all sectors, so you can mitigate the risk if the sector were to fail completely (or not provide the returns you hoped for).

Are you searching for investments which outperform bank interest rates?​

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