Investing in oil and gas are effective ways to grow wealth. The demand for these commodities never goes away, as countries still rely on them to run transportation, businesses, manufacturing, and many other industries. Oil and gas power cars, electronics, appliances, and other things people need, but not every investment has a positive effect. Here, potential investors can get some investment advice on the pros and cons of playing the oil and gas markets.
Advantages of Investing in Gas and Oil
Profit margins typically increase when a deep-well exploration hits a substantial oil reserve. It’s well-known that an investment’s return can be five or ten times greater than the preliminary capital. Wells can certainly pay off, and the richest ones can last for quite a few years. However, when stocks fall, it pays to have a diverse portfolio that includes investments outside of oil.
Oil and gas investors also get certain tax advantages, particularly if they make a play in a limited partnership, with about 15% of the investor’s share being eligible as a tax shelter. When a stock goes down due to resource depletion, a private investor can keep his or her cash flow under control. Investors can also reap the benefits of intangible drilling costs where they write off a portion of the first year’s income to cover incidental expenses.
Drawbacks of Oil and Gas Investment
Despite the fast, big returns and various tax advantages, investing in gas and oil can be risky. For one thing, market prices are in a constant state of flux. An investment’s profitability is dependent on nearby and international factors that are beyond an investor’s control. Losses can vary but, in some cases, they can be total.
Investing in a private company or limited partnership provides bigger gains, but it also means paying commissions that are higher than a stockbroker’s fees. Additionally, investing in a smaller company means that shares are less liquid than in public, larger companies. An investor’s income is subject to maintenance and operating fees as well. Scams are quite common, with many concealing an exploration’s real condition, interests, or existence.
Before an investor parts with his or her money, they should know about the company and the offer’s terms and conditions. Furthermore, investors should carefully weigh the benefits and risks of such a venture. While speculation is risky, it can yield a higher ROI.