How to Invest in Gemstones

Establish a business to buy and sell the gems. You will most likely need a wholesale license, called a sales tax license or sales privilege license. This gives you access to wholesalers, primary dealers and secondary dealers. If you don't have the license you will have to pay sales tax to your state on the purchase of the gems. If the sales price is $1,000 and your tax rate is 5 percent, you've just given away $50 of your potential profit.

There is no such thing as an "investment grade" gemstone. The terms "precious" and "semi precious" stones have no standard meaning either. The terms diamond, ruby, emerald and sapphires define certain gemstones, but they are also bandied about by less than scrupulous gem dealers who use them to sell inferior stones. For example: "Arkansas diamond" is actually quartz, "evening emerald" is peridot, "cape ruby" is garnet and "Lux sapphire" is iolite. Gemstones are sold in the rough form straight from the mine, or cut and polished. Either can be a good or bad investment, depending on how much you spend.

Size counts, but bigger isn't better. It's how much the gemstone weighs. Different gemstones have different weights, even if they're the same size. A ruby weighs more than a diamond, while an emerald weights less. A one carat ruby is smaller than a one carat diamond and a one carat emerald is bigger. Gemstones can also be cut to look bigger. Gemstones that weigh more cost more per carat because they're rarer. So a three carat ruby might cost $15,000 per carat for a total of $45,000. while a two carat ruby only costs $8,000 per carat for a total of $16,000. One more thing: Don't be misled by total carat weight of a piece of jewelry. A slew of little bitty emeralds isn't nearly as valuable as a heavier single emerald, even though the total weight of both may be the same.

Okay, here is where it gets confusing. Diamonds that are closer to blue-white are more valuable than diamonds that progress towards yellow and brown. But fancy diamonds -- ones that are red, pink, bright yellow, orange, green, blue or purple -- are more valuable than blue-white diamonds. If that's not enough, don't assume the red stone you're looking at is a ruby and the green one is an emerald. That red stone might be a ruby, garnet, red beryl, morganite or spinel. The green stone could be an emerald or it could be a sapphire, demantoid garnet, zircon, peridot or tanzanite. Colored gemstones are valued on how close their hue is to the spectral hue -- that found in a rainbow. The purer the color, the more valuable the stone.

Buying gemstones at retail, you pay a 50 percent markup over the wholesale cost of the jewelry, plus you're paying for the workmanship that went into creating the ring. Once you take that ring home you've lost half of its value if you need to resell it. Primary dealers mine and sell the stones. Secondary dealers buy from the primary dealers and sell to individuals, jewelers and wholesalers. Buying from the primary dealers gives you the best price but you have to know what you're doing. You usually get a better price if you buy in lots rather than single stones.

Part of the strategy in investing in gemstones is selling them later for a profit. Like any investment, you want to buy at a low price and sell at a high price. You have to do the selling yourself. Likely sources are jewelry stores, auction houses, other individuals investing in gemstones, and online auctions.