Investing in an oil ETF is a relatively new possibility. For years now, people have been investing in the oil market. After the invention of the oil ETF, many more investors can get involved in the oil market and profit from it if they invest correctly. The potential for profit is great and it can be safer than other forms of investment. Here are the basics of an oil ETF and how they work.

What They Are

In the past, there were only a few ways to invest in oil. You could go out and search for oil on your own and that would require that you own an oil company and the equipment to search for it. This option was only available to a few investors. 

Besides owning an oil company, you could also get involved in the futures market. You could speculate on the price of oil by actually buying a certain amount of it at a certain price on a date in the future. If the date came and the price was more than what you paid for the contract, you could make substantial amounts of money. While this was an option, it also eliminated most of the investors in the world due to its complexity. Not everyone understands how to do a futures contract, or even where to start. 

You could also buy the stock of a particular oil company. However, this was pretty risky as you never know how one company could perform. If they find a new deposit of oil, the stock might skyrocket. If things go poorly, it could plummet. 

With the oil ETF, many of the problems with these other investments were solved. Instead of investing in a particular thing, the ETF would create a diversified portfolio of sections within the oil industry. You were theoretically investing in several different companies all at once. This limited your risk, but still allowed you to profit from the booming oil industry. 

Different Options

With an oil ETF, you have several options from which to choose. You are not just investing in the oil industry as a whole. You could purchase a crude oil ETF and track the price of crude oil as it goes. Therefore, if the price goes up, you stand to make a significant amount of money. For example, you could invest in USO which is publicly traded on the New York Stock Exchange. This will allow you to buy and sell the ETF on the exchange freely. You can speculate on the price of oil without going out and buying a futures contract. 

You could also buy an ETF that invests in several different oil companies at once. This way it will not depend solely on the price of the oil, but of the overall performance of the companies that are involved. 

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