How Does Energy Trading Work?

In today’s context, energy is used almost everywhere. We use it to heat homes, charge smartphones, and power up vehicles and plants. We greatly rely on the energy supply for work and everyday life. The ability of energy to boost the development of human society and drive innovations makes it a valuable asset.

Such commodities as crude oil or gas are traded on a wholesale market, while electricity is commonly supplied from a direct power plant owned by a producer. Energy assets are traded through options and futures. However, energy equities are traded on stock markets.

The main objective of energy traders is to profit from the price changes in the energy market. Traders use various tools and conduct thorough technical and fundamental analyses to benefit from trading energy assets. 

There are several ways to participate in energy trading: you can buy ETFs, trade commodities, or buy a stock in the stock market and become an owner of a certain company share.

Trading energy stocks is one of the most popular ways to enter the energy market. 

Energy stocks are shares that represent companies involved in the production, distribution and sale of energy commodities. These stocks can be traded via a broker or an online platform, where you can buy various stock categories, such as gas stocks, oil stocks or coal mining stocks. 

When you buy a stock, you acquire a stock outright and obtain partial ownership in the energy company. There are a lot of energy companies in the market, and it can be challenging to choose which one might be a good choice for buying its stock and profiting from it. Here are the top five of the biggest energy producers whose stocks are presented in the energy market:

  • ExxonMobil
  • General Electric
  • BP
  • Royal Dutch Shell
  • Chevron

Another option to invest in the energy market is buying ETFs. ETFs, or exchange-traded funds, are investment funds, the shares of which can be purchased on the stock exchange. 

For instance, a gas oil ETF can invest in stocks related to gas extraction, delivery and sale. It enables investors to profit more diversified from only one investment.

ETFs attempt to reproduce an index of global equities in the energy sector. They can be purchased and sold via a broker or traded through CFDs.

Here are a list of the most popular ETFs that track highly efficient equities in the energy market globally:

  • Vanguard Energy ETF
  • Invesco Solar ETF
  • iShares Global Energy ETF
  • First Trust Energy AlphaDEX ETF
  • SPDR S&P Oil & Gas Exploration & Production ETF

Energy ETFs are a good choice since they spread the risk associated with energy equities trading over multiple assets. In other words, if the price of one stock decreases, the others will balance the damage to the total performance of funds. Plus, trading multiple assets simultaneously can also help to diversify your total portfolio.

Despite all the advantages, energy ETF trading has risks from market volatility, slippage, or gapping.

To avoid these risks or minimise their harmful effects, traders should thoroughly analyse price charts and pay attention to the levels of funds volatility.

Contracts for differences, or CFDs, can also be used for trading in the energy market. CFDs enable you to long- and short-trade and earn money from the rising and falling market.

With CFDs, you are not the actual owner of the commodity, but you can speculate on its future price movements.  

Another option is P2P energy trading.

Peer-to-peer trading (or P2P) allows customers to choose who they sell and buy the energy from. Such trading occurs on the protected platform via a secure network often powered by blockchain technology. P2P energy trading systems enable customers to share extra energy and control its distribution via microgrids.

Recently, renewable energy trading has started to gather pace in the market. It is now one of the most popular trades due to potential significant returns. Tesla and First Solar are developing sustainable energy for companies and homes. 

Trading and investing in energy can be very profitable. However, there are aspects to consider if you want to profit from your trading. To succeed in the energy market, you should thoroughly analyse factors such as a company’s market capitalisation, dividend yield, share price, and more. For example, high dividend payments may signal the company has relatively stable cash flows and balance sheets, which is a good sign for an investor since it guarantees consistent dividends.

How Does Energy Trading Work?

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