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What's The Best Way To Take Advantage Of A Booming Oil And Gas Market?

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If you've found yourself wishing you had more investment knowledge each time you hear about the price of gold skyrocketing or that a new IPO that has quadrupled in value in its first day on the market, you're not alone -- less than 50 percent of Americans have money invested in the stock market, and many cite inexperience or lack of knowledge about stocks as one of the primary reasons for this avoidance. However, staying on the sidelines during the next few years could cost you. Read on to learn more about some of the different ways you can take advantage of rising prices in the oil and gas sector without putting your financial future at risk.

What are some of the ways you can invest in the oil and gas field?

There are a number of different types of investment, and the right choice for you may largely depend on the amount you'd like to invest, your risk tolerance, and your desire to be "hands-on" with your investment.

  • Oil and gas index funds

Rather than pouring all your funds into a single company, investing in a slice of many companies by purchasing some shares of an index fund that specializes in oil and gas investments can be a great way to gain exposure to this market without running the risk that a business will go bankrupt (as can be the case with individual stocks).

  • Oil or gas wells

Another investment option is to go straight to the source by purchasing shares of an oil or gas well. Unlike an index fund, which will usually pay dividends in addition to any increase in price, an oil or gas well is usually held by a "micro-cap" or private investor and may pay out dividends on a regular basis or simply reinvest these funds back into the well. You'll usually need a special type of private broker to handle this transaction, and it can be higher-risk than investing in index funds or even individual stocks.

  • Individual stocks

There are a number of oil and gas companies that are deemed nearly "too big to fail" -- and investing in one of these companies' stocks can pay a significant return over time.

What can you do to preserve your capital when investing in oil and gas?

One of the main reasons some novice investors avoid the stock market is fear of losing their hard-earned money on a bad investment. While this fear can be a grounded one, risk and reward tend to be inverted when it comes to investing, and you're unlikely to make any money on an investment if you play it completely safe (like keeping it in cash). On the other hand, investing in risky ventures could be too much of a roller coaster ride for you to handle.

To keep your money as safe as possible, it's important to avoid uncompensated risk -- risk without a corresponding reward. This can often mean sticking to broader index funds or well-established companies over more speculative investments like futures or options.