Why Do So Many Investors Take A Punt On Oil Stocks?

If you visit some of the most popular share trading forums you will often find lots of discussions about oil stocks

. This is no coincidence because these kind of stocks are some of the most popular ones with many investors. So why are they really popular?

Well the fact is that they potentially offer some very handsome returns. They are definitely high risk, but if these companies find oil in the regions that they are exploring, they can suddenly start making massive profits.

You will often find that a lot of these smaller companies really struggle to survive in the first few years of their existence as they attempt to raise money for new exploration projects, but one major find can turn their whole company around. All of a sudden they can start making healthy profits each year, and this increased cashflow can of course help pay for new projects so they can potentially grow and grow.

The net result is that the share price of one of these successful oil companies can go up quite dramatically. Indeed a lot of the most successful multi-baggers are often oil companies because they can grow a lot quicker than companies in other sectors if they happen to get lucky with one or two oil finds.

This may instantly sound very appealing to many people who have never invested in small-cap oil stocks before, but I should point out that these success stories are the exception. Nearly all of these companies will fail to become profitable companies in the long run, and most will end up going bankrupt at some stage.

You are effectively gambling with your hard-earned money when you invest in any small-cap oil company. Yes you may get lucky, but you could also lose it all if you are not careful. That's why you should only play with money you can afford to lose. Oil stocks are highly speculative and so they should only be a small part of your overall portfolio, if you do decide to take a few risks.

Some people have made a lot of money investing in the right shares at the right time, but most investors do not have the same kind of results. Even if you do lots of research and read the various forums, there are still no guarantees that the companies you invest in will actually come good.

So the point is that you can have a bit of fun with oil stocks, but you should only play with money you can afford to lose. Hopefully you will get lucky with one or two companies that strike oil and multi-bag, because they will more than compensate for the many others that you may have invested in that failed to survive.

by: John Robertson

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