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How to invest in natural gas

Here are 4 ways to invest in natural gas.

Natural gas has been a reliable source of energy since the mid-19th Century and currently makes up nearly a third of America’s annual energy production. As a result of its availability and necessity, it has become a mainstream commodity on the financial markets. There are plenty of ways to invest in natural gas, and we’ve pulled together the main ones here.

Invest in natural gas at a glance

  • Natural gas makes up nearly a third of America’s annual energy production. As a result of its availability and necessity, it has become a mainstream commodity on the financial markets.
  • You can in vest in both natural gas exchange traded funds (ETFs) or natural gas company stocks.
  • Be aware of macro-economic factors like inflation, geopolitics and green energy policies when thinking about investing in natural gas.

4 ways to invest in natural gas

  1. Buy stocks in natural gas companies.
  2. Exchange-traded funds (ETFs).
  3. Master limited partnership stocks (MLPs).
  4. Natural gas futures

1. Buy stocks in natural gas companies

Buy stocks in a company are one of the more conventional ways to invest in any commodity. Stocks are simple to buy through brokerage accounts and online trading platforms. There are multiple natural gas companies you can invest in. While many are big oil names you’re familiar with, others are smaller names of specialty companies. Here are a few to consider researching:

Big natural gas producers

Smaller natural gas companies

Pros

  • Buying stocks is one of the most conventional and accessible ways of entering the market.
  • You can choose to invest in a variety of different companies.
  • You can exit the market at any time by selling your stocks.

Cons

  • Interference from businesses involved in the refining and distribution processes can curb a company’s stock value, meaning value doesn’t always grow at the same rate as the price of the commodity.
  • Geo-political and environmental factors can easily influence the performance of a natural gas company’s stock.

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2. Invest in natural gas ETFs

Exchange-traded funds (ETFs) are a way of investing your money in a wider selection of assets rather than trusting just a few firms. You invest in a basket of assets instead of owning individual stocks. This helps to insulate yourself against some of the daily fluctuations of the market. Most ETFs are simple and accessible, and trading them works in a similar way to regular stocks.

If you are new to the world of investing, then ETFs may be the best choice for you; natural gas is an incredibly popular commodity with a range of companies and ETFs to choose from. Here are some of the most popular:

Popular natural gas ETFs

  • iShares U.S. Oil & Gas Exploration & Production ETF (IEO) tracks an index of about 50 oil and gas explorers and producers
  • SPDR S&P Oil & Gas Exploration & Production ETF (XOP) tracks an index of oil and gas explorers and producers
  • VanEckVectors Unconventional Oil & Gas ETF (FRAK) tracks an index of nearly 40 companies involved in fracking or other methods of extracting coal seam gas, shale gas and more
  • First Trust Natural Gas ETF (FCG) tracks more than 30 natural gas explorers and producers
  • United States Natural Gas Fund (UNG) tracks the commodity price
  • VelocityShares 3x Long Natural Gas (UGAZ) is a leveraged ETF for short-term trading that aims to triple the daily movements of the natural gas price
  • VelocityShares 3x Inverse Natural Gas (DGAZ) is an inverse leveraged ETF for short-term trading that aims to triple the daily movements in the opposite direction of the natural gas price

Pros

  • ETFs give you widespread access to the natural gas industry at a competitive price.
  • ETFs are less risky to invest in than individual stocks.

Cons

  • There is less control over your investment due to the diverse range of assets in an ETF.

3. Buy MLP stocks or invest in MLP ETFs

Master limited partnerships (MLPs) offer tax advantages in that profits are only taxed when they are distributed to the general and limited partners of the company. Many MLPs are attractive to long-term investors because their business structure is designed in a way that requires them to return profits to investors quarterly through high dividend payments.

There are risks that come with MLPs, however; those include variations in demand, market volatility and the fluctuations of prices, new legislation, environmental disasters or hazards, and political and social shifts. You can buy MLP stocks through online brokerages.

MLP natural gas ETFs

  • Alerian MLP ETF (AMLP) tracks an index of about 25 infrastructure MLP stocks
  • JPMorgan Alerian MLP Index ETN (AMJ) tracks a more general oil and gas MLP index

MLP natural gas company stocks

Pros

  • Some of the dividend payments offered can bring strong returns on your investment.
  • MLPs are easy to access through brokerage accounts and financial advisors.

Cons

  • As with shares, businesses with an interest in the manufacturing process can influence market value, meaning stock prices may not be in line with commodity prices.
  • Demand and market risk can have an impact on MLPs, and companies may choose to withdraw their dividends.

4. Buy natural gas futures

Futures are a more advanced and risky investment that’s subject to both the fluctuations of the market and the knowledge of the buyer. Futures are a high-risk, high-reward system. Newcomers may want to gain some experience in the field before purchasing futures. To trade futures, you’ll need one of the handful of popular brokerage accounts that support futures as not all mainstream brokerages do.

Futures, as the name suggests, are a way of buying natural gas directly at a later date and an agreed-upon price. They’re a staple for big natural gas producers or utilities that buy vast amounts of natural gas, though seasoned investors and speculators can also trade them; depending on market movements, you may end up making a solid return on your investment or just as easily losing money.
Pros

  • With a good knowledge of the market and some good fortune, natural gas futures could bring you large returns on your investment.
  • A very direct way of owning a commodity.

Cons

  • The market is unpredictable and constantly fluctuating, and futures are vulnerable to these movements. Investing at the wrong time could lead to losses.
  • If you don’t act on futures within the specified period, they expire and are worth nothing.

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How much is natural gas worth now?

When is a good time to invest in natural gas?

Natural gas is one of the cyclical industries where it goes through times of boom and bust. To determine whether it’s a good time to invest in gas, consider the following:

  • Inflation. In times of inflation, the price of natural gas is likely to rise.
  • Season. The price of natural gas is often impacted by seasonality — in winter, the demand for gas for heating is higher, which is likely to cause a price increase.
  • Geopolitics. Wars and sanctions could heavily impact the price of natural gas, especially if a gas-producing country like Russia is involved. This could lower the supply of natural gas and increase its demand, thus increasing its price.
  • Green energy policies. Natural gas is a fossil fuel but it produces less pollution and greenhouse gases than other fossil fuels. This could increase the demand for natural gas in countries that want to implement green energy policies.

Is natural gas a safe investment?

The world relies on natural gas for energy that’s cleaner than coal, and its abundance makes it quite a reliable commodity on the stock market. However, the market is never completely safe, and natural gas is no exception:

  • Pipeline incidents: A risk for the environment as well as your profits, a burst pipeline can have disastrous effects on both your investments and the ecosystem at large.
  • Dividend cuts: Gas companies often distribute dividends which allow investments to generate regular income. If a company cannot make enough money, however, dividends can be cut. This can lead to stock prices plummeting.
  • Price volatility: Prices for natural gas have fluctuated violently over the years, usually as a result of shifts in supply. Gas is also seasonal, with people using more during the winter, which also affects prices.

ETFs are a fairly popular investment option in the US, with 19% of investors choosing to ETFs as a vehicle for growing their wealth.

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