There are many ways to invest in electricity. You can invest directly in power companies, like coal or nuclear utilities. Or, you can invest in trusts, and some of the most profitable investments are in electricity futures trading. However, the most common type of investments are in utilities.
Investing In Utilities
A utility company provides power to consumers via various means. If it’s a nuclear power plant, it provides electricity from nuclear power. If it’s a coal power plant, it produces electricity from coal. If it’s an oil power plant, it provides electricity generated by oil.
Some investors choose electricity trading options like utility trusts, which are income-producing trusts that invest in utility companies. Instead of being focused on the growth of the trust’s value, the trust’s goals are to provide stable income to investors.
Regardless of the type of investment, the idea of investing in utilities is to make money off of the rising price of utility company stock. Generally, this happens as utility prices rise.
In other words, when electricity prices rise, the price of the utility company may also rise. If there is a shortage of power, due to an increase in an underlying power source, then the price of the utility company may also rise.
For example, if the price of oil rises, it becomes more expensive to produce electricity generated by oil. Understanding this helps guide you toward profitable energy companies.
How Utility Companies Work
Utility companies charge consumers for the use of power through a power grid. The power grid maintains a stable network of electricity so that every home, office, and business is wired and accepts electricity. Consumers pay for power in kilowatt hours or kWh.
The advantages of investing in electricity are many. Because almost everyone needs it, the demand is unlikely to decrease. In fact, many experts believe that demand will increase by 35 percent by 2030. However, because electricity is primarily generated from fossil fuels, the price fluctuates based on the supply of the underlying commodity.
Like other commodities, electricity benefits from many avenues of entry. Investors can invest directly in companies, in mutual funds, or through electricity futures trading.
Electricity cannot be mined out of the earth, like oil can. For this reason, electricity is said to be a “secondary commodity.” As its demand rises, and as companies struggle to provide affordable options in the face of rising commodity prices, investors win.
One of the disadvantages of utilities, from an investor perspective, is the privatization of companies. Right now, utilities benefit from a sort of quasi monopolistic status. That means that investors are all but guaranteed a safe investment. But, if companies become privatized, or semi-privatized, valuations could fluctuate substantially.
One of the most popular ways investors invest in utilities is through mutual funds, But, utility funds are also sensitive to changes in interest rates, which can be a disadvantage. When rates rise, the value of the fund decline due to investors seeking the higher yields of bonds.
Finally, sometimes regulation can actually cause investors to lose money. For example, if price regulations are imposed to hold down energy costs, this can cause utility investments to flatten out, even when the price of energy begins to rise in real terms.
When To Invest
Investing in energy stocks, or funds, can be done at any time. There’s really no seasonality advantage. What’s important is that you understand the risks prior to investing.
So, for instance, if you don’t know much about electricity trading, you should either not do it, or you should spend considerable time learning how it’s done properly. The same holds true for other types of investments, like investing in utility stocks or mutual funds.