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How to invest in natural gas
A guide to buying, selling and investing in gas.
This guide discusses the four main ways that you can invest in natural gas, as well as any risks that may come with these options:
- Buy gas stocks
- Buy gas ETF units
- Trade gas futures
- Invest in MLPs
What's in this guide?
Compare online brokers to trade natural gas stocks, ETFs and CFDs
Investing in gas ETFs
Exchange-traded funds (ETFs) are a way of investing your money in a selection of assets rather than buying shares in a couple of specific companies. Find out more about ETFs.
ETFs are fairly simple and accessible, and trading them works in a similar way to regular stocks. As well as being relatively straightforward, ETFs are also seen as less risky. By investing in a basket of assets, you leave yourself less vulnerable to the fluctuations of the market.
If you are new to the world of investment, then ETFs may be the best choice for you. Gas is an incredibly popular commodity, with a range of companies and ETFs to choose from.
Pros
- ETFs give you widespread access to the natural gas industry at a competitive price.
- In comparison to some of the other options, ETFs are seen as a safer, more reliable choice for investors.
Cons
- There is less control over your investment due to the diverse range of assets in an ETF.
Trading gas futures
Futures are a direct but risky investment, which are subject to both the fluctuations of the market and the knowledge of the buyer. A high-risk, high-reward system, newcomers may want to gain some experience in the field before purchasing futures.
Futures, as the name suggests, are a way of buying gas at a later date at an agreed price. Depending on market movements you may end up making a solid return on your investment, or just as easily losing money.
In New Zealand, one of the most common methods for trading gas and other commodity futures is through CFD brokers. This way you never actually own the underlying commodity but can still profit from gas price fluctuations. You can check out the table below for more information.
Some of the most commonly traded ‘gas’ commodities in the futures markets include:
- Liquid Natural Gas
- Low Sulphur gasoline
- Gasoline
Pros
- With a good knowledge of the market and some good fortune, gas futures could bring you large returns on your investment.
- A very direct way of owning a share of a commodity.
Cons
- The market is unpredictable and constantly fluctuating – futures are vulnerable to these movements and making the wrong investment can lose you money.
- If you don’t act on futures within the specified period they expire and are worth nothing.
Buying shares in gas companies
Stocks are one of the more conventional ways to invest in a commodity. Gas is a popular investment and a necessary form of energy for many households around the world, so there are multiple gas-producing companies to choose from: ranging from Chevron to BHP. Stocks are simple to buy through brokers and advisors, but the decision on what shares to buy is up to you!
Buying stocks takes some knowledge of the market and its fluctuations, but this can be safer than investing in futures as you buy stock at the current price that is displayed. However, ETFs may still be a safer option as you aren’t relying on the performance of just one or two companies.
Pros
- One of the most conventional and accessible ways of entering the market.
- Choose from a variety of stock from different companies.
- Exit the market at any time.
Cons
- Interference from businesses involved in the refining process can curb a company’s stock value, so share prices don’t always grow at the same rate as the price of the commodity itself.
- As with all shares on the stock market, their value can go down as well as up.
Investing in MLPs
It is also possible to buy stocks in Master Limited Partnerships (MLPs). These are structured to offer certain tax advantages that mean profits are only taxed when they are distributed to the general and limited partners of a company. This type of set-up is appealing to some investors, as MLP returns are not taxed in the same way as dividend-paying shares.
MLPs also tend to be seen as a lower risk, but longer-term, investment option. However, there are some risks that come with MLPs, including demand, market volatility and the fluctuation of prices, as well as new legislation, environmental disasters/hazards and political and social shifts.
Pros
- Some of the dividend payments offered can bring strong returns on your investment.
- MLPs are easy to access through brokers and advisors.
Cons
- As with shares, businesses with an interest in the manufacturing process of gas 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.
Is gas a safe investment?
The world relies on gas for energy, and its abundance makes it quite a reliable commodity on the stock market. However, the market is never completely safe, and 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 to shareholders, which allows their investment to make a regular income. However, if a company cannot make enough money, dividends can be cut, which can lead to stock prices plummeting.
- Price volatility: Prices for 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 can also affect prices.
FAQs
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs comes with a higher risk of losing money rapidly due to leverage. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.
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