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Investing in railroad stocks

They can be robust under strong economies, but volatility can derail your investment.

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Investing in railroad stocks during a strong economy can deliver serious returns. But because they’re affected by various sectors from agriculture to oil and gas, these securities can be highly volatile and difficult to analyze.

What are railroad stocks?

Railroad stocks are shares of companies that transport people, goods and raw materials across networks of train tracks. There are three main ways railroads operate:

  • Cars transport freight on tracks that the railroad company is paid to move.
  • Railroads lease excess cars to other railroads for a fee.
  • Passenger railway companies move people around.

Railroad companies can be viewed as the lifeline to our industrialized society. In one way or another, the railroad impacts your everyday life. Before your nonperishable food items got to your home, before gas got into your car, before coal got to the plant that produces electricity for your city, these products probably went down a railroad track.

You can invest in railroad stocks around the world from small to very large companies.

Why invest in railroad stocks?

Many people invest in railroads because the industry is closely linked to the overall economy. Railroad companies transport packaged goods, electronics, food, gas, oil and more to consumers and other companies. Investing in railroad stocks is a way to invest in the entire industrial sector and the economy as a whole. This is why railroad stocks tend to perform well when economies are strong.

Some people also see investing in railroads as an investment in the economic might of the country. Towson University’s Regional Economic Studies Institute noted that in 2017, operations and capital investment of the major freight railroads in the US was responsible for creating nearly 1.1 million jobs and generating $219 billion in economic output. Beyond that, the global rolling stock market is projected to reach $73.8 billion in 2025 from $54.43 billion in 2018.

Risks of investing in railroad stocks

Railroad stocks can be highly volatile during weak economies or when specific sectors are facing strain because railroad tracks connect many sectors of the economy. For example, if there’s a shortage of timber and you invest in a railroad company that specializes in transporting timber, that company and your stock may face some losses. Pay attention to the economic state of commodities like coal, oil, gas and precious metals like gold, silver and cobalt.

Another factor that could affect the performance of railroad stocks is political turmoil. Some people are critical of the oil and gas industry, so if countries pass laws that limit their production or exposure, the railroad companies that serve those industries may suffer.

You should also look at the railroad’s competition such as the trucking industry.

When analyzing railroad stocks, consider the company’s operating ratio. This is the ratio of its operating expenses to revenue. Carefully analyze the company’s management team and what they plan to do to lower this ratio in the future. You can also look into train speed and terminal car dwell. This is the amount of time a vehicle remains idle on the platform. If it’s unusually high or trains are particularly slow for one company, that should be a red flag. You’d want to see fast-moving freights with little downtime.

Railroad stocks

There are several railroad stocks you can invest in around the world. Some examples include: Select a company to learn more about what they do and how their stock performs, including market capitalization, the price-to-earnings (P/E) ratio, price/earnings-to-growth (PEG) ratio and dividend yield. While this list includes a selection of the most well-known and popular stocks, it doesn't include every stock available.

What ETFs track the railroad industry?

While there aren’t ETFs that solely invest in railroad stocks, you can invest in ETFs that track the wider transportation industry, such as:

  • SPDR S&P Smart Mobility ETF (HAIL)
  • iShares Transportation Average ETF (IYT)
  • SPDR S&P Transportation ETF (XTN)

Compare trading platforms

Before you begin investing in railroad stocks, you’ll need to open a brokerage account with an investment provider. Some of these brokers allow you to buy and sell railroad stocks online. A robo-advisor or human adviser can also build a diversified portfolio for you based on your risk tolerance and goals.

Name Product Stock trade fee Asset types Option trade fee Annual fee
Vanguard
$0
Stocks, Mutual funds, ETFs, Forex
$1
$20 per year
Get a personal advisor when you open an account with at least $50,000.
Sofi Invest
$0
Stocks, ETFs, Cryptocurrency
N/A
0%
A free way to invest in stocks, ETFs and crypto.
Robinhood
$0
Stocks, Options, ETFs, Cryptocurrency
$0
0%
Make unlimited commission-free trades in stocks, funds, and options with Robinhood Financial.
Interactive Brokers
$0
Stocks, Bonds, Options, Mutual funds, Index funds, ETFs, Futures, Cash
$0 + $0.65/contract, $1 minimum
0%
IBKR Lite offers $0 commissions, and IBKR Pro offers advanced tools for professional traders.
TD Ameritrade
$0
or $25 broker-assisted
Stocks
$0 + $0.65/contract,
or $25 broker-assisted
TD Ameritrade features $0 commission for online stock, but watch out for high short-term ETF and broker-assisted trading fees.
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Compare up to 4 providers

Disclaimer: The value of any investment can go up or down depending on news, trends and market conditions. We are not investment advisers, so do your own due diligence to understand the risks before you invest.

Bottom line

Investing in railroad stocks can be a way to boost the country’s economy while potentially receiving handsome gains. But because the railroad industry is interconnected with many other economic sectors, railroad stocks can be particularly volatile and require careful analysis. Your returns can also be affected by the stock-trading platform you use, so always compare your options.

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