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Gold trading has become easier over the years. It continues to be on the average investor’s list of top ways to hedge your wealth.
There are multiple ways to trade gold without buying physical gold, including investing in gold stocks on the stock market. This article will guide you through the types of gold stocks and their advantages.
What are Gold Stocks?
Gold stocks are publicly-traded gold-focused investments. These are indirect ways to trade gold if you don’t have enough to buy physical gold or want to avoid it altogether.
The three main types of entities that provide a path to trade gold stocks are gold mining stocks, gold-focused exchange-traded funds (ETFs), and gold royalties and streaming companies.
Gold mining stocks
Gold mining stocks refer to the stocks of companies that engage in gold mining and selling. The difference between gold mining company stocks and physical gold is that stocks aren’t at the same prices as gold bullion.
Your investment largely depends on the success of the stocks of that company and not necessarily on the increasing prices of gold.
Gold-focused exchange-traded funds (ETFs)
Trading with gold-focused exchange-traded funds (ETFs) involves buying stocks in funds that own physical gold or trade collectively in the stocks of gold mining companies. It allows gold investors to purchase stocks of multiple companies in a specific market segment at once.
The type of ETF depends on the goal of that fund. For instance, S&P500 invests in 500 companies at the same time.
Gold royalties and streaming companies
Gold royalties and streaming companies pay mining companies a fee in exchange for a percentage of their mining revenue (royalties) or future gold production (streaming). Streaming companies buy the physical gold at a discounted price and have the gold delivered at a later date once mined.
On the other hand, you do not need to see or touch the gold to receive a percentage of the profits of the gold mining operations. Streaming companies deal in the physical metal, while royalties deal in cash.
6 Advantages of Trading Gold Stocks
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No need to buy insurance
Unlike physical gold, gold trading with gold stocks does not necessitate the purchase of home insurance to protect your investment. Every transaction happens online, and without handling the physical gold, you needn’t worry about protecting your investment.
Dealing directly with physical gold requires you to purchase additional insurance to protect your investment if anything happens. Whether you have passcode locks or CCTV cameras pointed at every corner of your house, storing gold at home means there’s a risk you might get robbed.
Opportunity to earn higher returns.
Through wise business decisions, some gold stocks perform better than physical gold. They provide a higher earning opportunity than trading CFDs or buying and selling gold directly.
Gold mining companies can expand production and increase their value, enabling investors or stock buyers to earn higher returns on stock prices. Profit margins of some gold streamers are also higher than what you’ll get with trading gold bullion bars.
However, not all gold stocks or funds perform exceptionally. Investors should carefully choose which gold stocks to invest in.
Easier portfolio diversification
Investment professionals always advise investors to diversify their investment portfolios. Gold stocks allow you to diversify your investment portfolio without leaving the industry altogether.
Investors can key into multiple gold mining stocks directly, go through an ETF, or buy gold stocks of gold streaming companies. For example, one stock purchase in an ETF means buying into earning opportunities of hundreds of gold companies.
Gold stocks, specifically gold streaming companies, enable you to spread your risks across multiple gold mines. Some streaming companies invest in as many as or over 200 mines.
If one mine fails, there’s still the possibility of receiving profits from other mines they’ve invested in. You may not feel the impact of those few unproductive mines because they have significantly spread your investment risks across many of those mines.
With mining royalties, for example, you get a lesser risk margin as these royalty companies invest in multiple mining companies at different stages of production. They could invest at the mining stage for one mine and the production stage for another.
Buy gold at a reduced price
This advantage is especially significant for trading gold stocks in streaming companies. Streaming companies usually purchase gold at a high-profit margin. Enough margin that they can stay profitable even if the spot price of gold falls.
A gold streaming company can buy gold at $700 while the market price is $1300. Suppose the spot price of gold fell to 1200 or 1000, the streaming company would still make a good profit off that transaction.
It’s generally less risky than buying only one stock or holding gold physically.
Quicker path to liquidity
Gold trading with stocks allows better liquidity, especially with ETFs and gold mining stocks. It’s easier to buy and sell gold stocks than physical gold.
To invest in gold via gold-stock entities, you only need to find the best brokers or trading platforms, make your deposit, and select your first trade. Selling and receiving your profits are only a few clicks away at the current price.
With physical gold, you have to find gold bullion buyers or traders who will buy at a reasonable price. Selling to gold merchants usually means selling at a lower price than the current market price because they’ll want to profit from that sale.
Comparison between trading gold stocks and gold bullion (table)
Gold stocks are generally easier to handle than physical gold bars. You wouldn’t need to purchase home insurance for your gold-stock trades, and you can sell your gold holdings at the current market price.
For these reasons, many traders would prefer investing in gold stocks over gold bullion. However, every financial investment has its own risk, so you should take time to do research and find the best type of gold stock to invest in.