Just like back in the old west days, gold mining companies invest time and resources to discover, mine and process gold. To be able to finance this expensive operation many companies will offer public shares which, as you probably know, allows the average person to own a small piece of the company. When the prices for gold goes up, so does the profit margin and that’s when the investor can see a profit from owning gold mining stocks.
To increase your chances of making money, and not losing money, there are some simple steps you can take. Remember though, all types of investing carry some risk, though you may be able to mitigate a lot of the risk by gaining knowledge, you can’t guarantee you’ll make money so never invest more than you can afford to lose.
One thing you should do first is to figure out how much money you can allocate to buy mining shares. The general rule is to have about 10% of your portfolio made up with precious metals, but since mining has it’s own unique dangers not all of your precious metals allocation should come from mining company shares.
Pick your companies. Some people prefer to go with just one large cap company for their mining shares allocation. Other’s prefer to have several mining companies as part of their portfolio, so if one company fails they aren’t completely out in the cold.
Still others enjoy the thrill of investing in younger companies that don’t have much of a track record. This can give them huge paydays if the company does well. Of course, the risk is much greater too.
When choosing your stocks consider the debt, cash flow and mineral reserves of a chosen company.
It’s also a good idea to familiarize yourself with the countries that the mining company does business in as this can provide clues to various threats to their bottom line. We all know there are some very unstable regions around the world, if the company you are looking at does business in these areas they may face issues that will force them to slow down, or shut down, production.
Remember, that mines need to pay for the equipment and workers to run their mines. Keep this in mind as well when researching companies. Depending on their location they may or may not have access to sufficient labor pools and other resources.
You can also buy shares in a company that owns the gold, not just the mine. These are called EFT’s. They are bought and sold like stocks, they are stocks. You don’t actually own any stock in the mining companies themselves most of the time, and you don’t actually own any gold. Keep these factors in mind before you decide whether or not EFT’s are the right way for you to go.
For many investors looking for a hedge against falling dollar values, investing in gold mining stocks just makes a lot of sense. If you think it makes sense for you too, there are many places you can go to purchase them. Do your homework first though so you can end up with the pot of gold instead of just the shaft.