Energy stocks are often part of an investor’s portfolio because these stocks provide diversification. There are many different kinds of energy companies, including exploration and production, oilfield services, pipelines, storage and transportation of oil and gas, and renewable energy such as solar, wind, or geothermal heat.
Energy stocks make up one of the 11 sectors in the S&P 500, which consists of the 500 largest stocks in the U.S. For an investor looking for the top energy stocks, this is the list to watch.
How to Choose an Energy Sector Stock
The energy industry is large and complex. In the oil and natural gas industries alone, there are upstream (production), midstream (transport), and downstream (finished product applications) companies in which an investor might choose to invest their money.
For some investors, the source of the energy can impact their interest in owning stock. Coal used to be a major fuel source, but renewable energy has become more popular—as have renewable energy stocks. Beyond more commonly known wind, solar, and geothermal energies, other sources of renewable energy include hydropower, biodiesel, ethanol, wood and wood waste, and municipal solid waste.
Renewable energy is often used in generating electricity and the usage is steadily rising, according to the U.S. Energy Information Administration (EIA). The EIA states that renewable energy sources contributed to 20% of total electricity generation in 2020, up 3% from the previous year, and is on track to hit 22% in 2021.
How to Invest in Individual Energy Sector Stocks
One way to invest in the energy industry is to buy individual stocks of oil and gas companies or renewable energy companies. When an investor owns individual energy stocks, they have the freedom to buy and sell them as frequently they choose, and also to engage in options trading strategies.
When investing in a particular stock, the more hands-on learning the investor can do about the company, the better informed they’ll be. In considering renewable energy stocks or other energy stocks, an investor might want to examine the company’s finances—including cash flow, debt, and other factors such as the price-to-earnings ratio and the dividend payout ratio. Investors might also research the history of the stock and how it has performed over the past 10, five or even one year.
Investors might also compare individual energy stocks with other similar ones that are involved in other aspects of the industry.
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The Downside of Buying Individual Energy Sector Stocks
Choosing individual energy sector stocks—whether from oil and gas companies or solar and wind farms—can be challenging and require an investor’s time in researching a company’s financials for a clearer overall picture.
Additionally, buying individual shares of a company can be risky since stock prices can be volatile. There are many factors that can impact an energy stock price, such as the price of crude oil, the price of natural gas, geopolitical issues, decisions made by OPEC, supply and demand from various industries and consumers, and other economic issues.
How to Invest in Energy ETFs
Some investors prefer to invest in exchange-traded funds (ETFs) which are composed of dozens or even hundreds of stocks in an industry.
This diverse investment bundle generally lowers the amount of risk for an investor, vs owning individual stocks.
One advantage of investing in an energy ETF is that an investor can start by buying just one or two shares of the ETF and gradually add more shares as their budget allows.
With energy sector ETFs, investors can choose to invest in ETFs that focus on oil and natural gas, or solar companies, or more generally on renewable energy or clean energy.
Additionally, investors can look for buzzwords like green investing that may indicate an overlap of industries and missions.
Energy stocks—whether shares in oil or natural gas companies, or solar or other renewable energy stocks—can be a vital part of a diverse investment portfolio. Investors can home in on a particular part of the sector that interests them, or else invest broadly in the sector.
As with other sectors, when it comes to investing in energy sector stocks, investors might choose to buy individual shares, or they might invest in an energy sector ETF. The decision comes down to personal opinion and comfort level.
With SoFi Invest®, investors can buy shares of energy and other sector stocks, invest in ETFs, and more.
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