By James Woolley
If you have been involved in stock market investing for any length of time, you will know that there are lots of people who like to invest in oil companies. Indeed if you go to the forums there will be lots of speculators on there who are looking for the next big thing in the oil sector. So why are oil stocks so popular?
Well as I’ve already alluded to, they are highly speculative but the rewards can be absolutely huge. Just one good oil find can be a potential company-maker. In other words you can have a really small company that drifts along each year slowly losing money as it continues in vain to look for new areas where oil hasn’t yet been found. Then one day it can find a large supply of oil and all of a sudden the outlook for the company completely changes.
A company can easily go from a small-cap loss-making company to a mid or large-cap company that’s making huge profits each year. Obviously when this happens the share price goes through the roof and you have a real multi-bagger on your hands.
So it is clear why oil stocks are so popular. They are a gambler’s dream because you can make massive gains if you invest in the right companies.
However therein lies the problem. The truth is that these overnight success stories really are in the minority. Yes you may get a few success stories that make investors an awful lot of money, but you will also find plenty of examples of oil companies that never managed to fulfill their potential, or indeed make any money, and ultimately went bust.
The trouble is that it is such a risky sector to invest in. You can easily lose everything if you’re not careful. That’s why most older people and the more risk-averse investors generally steer well clear of them altogether and put their money into safer stocks with visible and more stable future earnings.
Ultimately though it’s entirely up to you. Some people have some spare cash lying around that they are prepared to write off in a worst case scenario. So in this instance it may be worth taking a punt on a few small oil stocks in the hoping of finding a potential multi-bagger or two. You could even set aside a tiny percentage of your capital to put into a few high risk oil companies. However the point I want to get across in this article is that you are basically gambling when investing in these oil stocks, so you should be prepared to lose money if they don’t strike oil.
Click here to learn more about investing in oil stocks, and to find out where you can access analyst forecasts online.