Investing in energy stocks
Energy stocks have been some of the stronger performers in 2022, but they come with some noted risks.
What are energy stocks?
Energy stocks fit into the energy sector of the stock market – 1 of 11 sectors defined by the Global Industry Classification Standard (GICS).
The GICS states "the Energy Sector comprises companies engaged in exploration & production, refining & marketing and storage & transportation of oil & gas and coal & consumable fuels. It also includes companies that offer oil & gas equipment and services."
It has also grown to include renewable energy as the world transitions to alternate sources.
What subcategories are included in this sector?
If you're investing in energy stocks, it could fall into any of the following subcategories:
- Oil and gas. At the start of the supply chain, we find companies responsible for drilling and producing oil and natural gas.
- Pipelines. These mid-stream providers transport oil and natural gas from the drilling site to their respective refineries.
- Mining. Mining companies produce coal that helps fuel power plants.
- Renewable energy. Those that produce wind and solar energy are considered renewable energy providers.
- Chemicals. This subcategory is comprised of companies responsible for refining oil and gas into specialty chemicals.
How to invest in energy stocks
There are 2 ways Australian investors can invest in the energy sector: individual stocks or exchange traded funds. Individual stocks are highly liquid but offer limited exposure. Sector-tracking ETFs are less risky than stocks and offer portfolio diversification but typically pay lower dividends and have higher fees.
You’ll need a brokerage account to invest in stocks and ETFs in Australia. Here’s a quick look at the process:
- Select a platform. Explore your brokerage account options to find the platform that best matches your investment goals.
- Open an account. Most brokerage accounts can be opened online. You’ll need to fund your account before you can make trades.
- Pick your securities. Use your platform’s research tools to search for stocks and ETFs by sector.
- Place an order. Once you’ve found a security you’d like to purchase, place your order.
- Track your investments. Monitor your investments by logging into your brokerage account.
Why invest in energy stocks?
Energy is a resource the world depends on. The energy market is massive, and for good reason – this resource has been in high demand for many years. And even accounting for the shift towards clean energy, the world is still decades away from being free from oil, coal and gas.
Profitability in the energy sector is largely tied to the price of crude oil, but stock prices are typically stable and frequently pay dividends. Income from energy stocks may also be tax-sheltered – an attractive incentive for Australian investors.
What unique risks does the energy sector face?
Politics play a sizeable role in the energy sector. If companies explore energy resources in unstable territories, projects are at risk of being sidelined or halted in the face of political turmoil.
Incorrect geological reports, oil spills and accidents can be costly for Australian investors. This sector isn’t without its risks and investors should weigh the benefits against the drawbacks before allocating funds.
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Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
Bottom line
The energy sector offers the opportunity for profit but carries a unique set of risks. The best way to invest depends on your portfolio and your investment goals. Review your trading platform options to find the brokerage account that best meets your needs.
Frequently asked questions
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 and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.
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