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Gold Stock Investing Explained

Gold stock investing is one investment option for anyone who is looking to invest in the precious metals market but does not want to take physical delivery of gold. What is gold stock investing? These investments are made into gold stocks, which represent companies that are publicly traded and that are in the industry of gold mining. Investing in gold mines has become more popular over the years, but just like any stock investment there are risks involved, and no guarantees. Gold stock investing is an investment into the company, not the actual physical gold.

Just like any other stocks, gold stocks in your portfolio should be well diversified. The gold stock market has ups and downs just like all other stock markets, and if you invest in gold stock from just one company and the market takes a downturn, you can see substantial losses. Instead, diversify your gold holdings. Buy stock in several different gold mining companies, so that the gold portion of your portfolio is spread across many companies instead of just one. This will help protect your investments. Normally, even when one area of the market is headed down, others are going up. Portfolio diversification will help keep your investments from all losing money, and over the long term your portfolio will stay stable and earn small returns. Unlike investing in physical gold, gold stock investing can result in a total loss of the investment capital if the market falls and your portfolio is not well diversified across the gold sector.

Two concepts that are crucial in gold stock investing are leverage and hedging. Leverage can help increase the potential return on your investment, but it can also open you up to bigger losses. Gold stock investing offers greater leverage than investing in physical gold, due to the operating leverage of the mining company, but there are also higher risks involved as well. Leverage is very important in gold stock investing, because it allows corporate earnings to be multiplied, and this will increase the price of gold stock. Leverage is normally used in the stock market through the use of options. Leverage is not the only factor that should be considered when looking at gold stock investing though. Gold mines which involve high costs to recover the gold are investments which carry more risk than gold mines which can recover the gold using low cost methods instead, but leverage in a gold market that is bullish may make high cost producers an opportunity for a bigger return on your investment, because of the leverage used.

Hedging is also another important concept to consider when looking into gold stock investing. Hedging involves making a contract that locks in the price of gold currently for gold that will be made available at a future date. Many gold mines use hedging as a guarantee that they will not see smaller profits if the price of the gold goes down in the future, but this can backfire and has resulted in gold mines going bankrupt at a time when the gold stock market is bullish and the price is rising. Companies hedge to protect against future price drops, but investors in gold stocks can lose money and returns when an investment is made in a gold mining company that uses hedging. The mine makes a deal with at least one private bank, and sometimes with many private banks, to sell gold that is mined in the future for a specific price, regardless of what the market price is. This can be a bad thing for investors, because if the price of gold on the market goes above the hedged price, stock holders lose potential returns due to the contracted price the gold is sold for. Watch out for hedged gold stocks, and use care before making any investment.

The information supplied in this article is not to be considered as medical advice and is for educational purposes only.

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