If you'd like to get involved in owning precious metals like gold and silver or investing in mined commodities like copper, you don't have to go out and actually buy ounces or tons of metal. You can participate in those markets through a few different tools. One indirect way to invest in metals is to buy shares of stock in companies that mine them. These investments can be complicated and risky, though, and its important to choose wisely.
Whether you're buying mining stock or shares of any other company, the process is similar. The first step is to open an account with any brokerage. Many will let you do this online. Next, you fund your account by transferring money in. You can do this by mailing or dropping off a check, doing a wire transfer or sending money electronically through an automated clearinghouse transfer, like an electronic bill payment. Once the money is in the account, you can contact the company and tell it which stock to buy and what the price is that you're willing to pay. Bear in mind that many mining companies trade on foreign exchanges, with a large concentration in Canada. You'll need to have an account that will allow you to trade internationally if you don't want to be limited to companies that trade on U.S.-based stock exchanges.
Established mining companies tend to be a purer play on the value of the minerals that they extract from the ground. When you have a very large company with known reserves and predictable management and operations, many of the variables get eliminated. It's possible that it could have a major find or that its CEO could pass away, but generally speaking, day-to-day changes get swallowed up by the company's large scale. What's left is the value of the assets that it mines. When mineral prices move, these miners' stocks move in lockstep. The share prices frequently move faster and more intensely than the minerals themselves. The reason for this is the leverage built into mining companies. If gold moves from $1,300 to $1,400 an ounce, it's a 7.7 percent increase. For a mining company that spends $900 per ounce to mine gold, that same shift increases its profit from $400 to $500, which is a 20 percent shift. A loss of $100 per ounce would have a similar impact.
Junior Mining Stocks
Junior miners are small mining operators. In many cases, they're more actively involved in prospecting than in actually taking metal out of the ground. This can make them very volatile and risky investments. The miners that don't find anything will eventually go out of business, making your investment worthless, but the ones that successfully find deposits could become very valuable as they transition from a speculative investment to one that is a reliable producer.
When you purchase a mining company's shares, you're exposed to two completely different pools of risk. First, you have all of the risk that comes from owning stock. You're exposed to the company's management, to the competitive market, and to the quality of its underlying assets -- its mining rights. Second, you're exposed to the market for the metal that it trades. If you buy a gold mining company and the price of gold drops, the stock will probably also drop When mineral prices go up, the stocks in the industry also go up.
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