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How-To: Invest in Mining Stocks

The mining industry is a highly volatile market, consisting of rising and declining prices in everything from commodities, fortune 500 businesses and ju...

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|Oct 9|magazine10 min read

The mining industry is a highly volatile market, consisting of rising and declining prices in everything from commodities, fortune 500 businesses and junior miners. Fortunately for those who invest in mining stocks, it creates prosperous buying opportunities for those who understand what volatility offers.

We break down the best ways to get started and how beginners can analyze stocks through market data and metal prices to better understand how they can earn a return.

How to get started

Investing in the mining sector is similar to playing fantasy football. You draft the best players available for their price and you bet every weekend they’re going to do well. During the season it’s up to you whether or not you to drop or trade them.

Investing in mining stocks consists of two groups: majors and juniors. Companies like Rio Tinto and BHP Billiton, corporations with decades of history, world-spanning operations and a slow and steady cash flow, represent majors. Juniors are essentially the exact opposite; little capital and little to none business history.

The first step to investing in mining stocks is valuing your options. To value a mining stock, investors should consider a company’s reserves. These are typically evaluated through feasibility studies, which verify the worth of a mining deposit. A feasibility study generally takes the estimated size and grade of the deposit and balances it against the costs and difficulties of extracting it all. If the deposit will earn more money on the market than it costs to dig up, then it is feasible.

The next question to consider is what kind of person are you? Are you willing to take a risk and throw money at a chance to make a lot of money or would you prefer a more certain option? These questions will help you answer what types of investments and stocks you should invest in.

Risks

Like most things in life, investing in mining stocks includes a certain amount of risk. If a mining major has a lot of deposits being staked and mined, the contents of any single deposit aren’t likely to alter the stock value too much. For a junior, however, the company lives or dies on the results of its feasibility studies.

If the feasibility is positive, then the value of the company may shoot up. Often times a junior miner won’t mine a feasible deposit to the end, rather selling the deposit to a larger miner and move on to its next big thing. In this sense, junior mining stocks form an exploration pipeline that feeds the major miners in the end. With this being said, the big risks and rewards typically reside at the junior mining level.

To keep risks down, it’s best not to be exposed to only one type of asset. Instead of putting all your money in one small company, it is better to be diversified across several different sectors, commodities and companies. Being invested more broadly lessens the risk of losing all your money at any one time.

Tips

As a beginner investor you should first decide whether you want to invest in junior mining stocks or major mining stocks. Juniors have the potential to offer a lot of appreciation in the right market, which makes them ideal for risky players. If you’re looking for lower-risk stocks with the potential for dividends and some decent appreciation, then major mining stocks are right for you.

Investing in a broad market, especially one that gives some international exposure is a smart move for first time investors. A portfolio consisting of plenty of diversification provides the steadier performance of large companies along with a bit of international companies and small caps.

The best tip for beginners is to spend time contemplating what you want to accomplish from investing and how to do so while staying within your risk tolerance “comfort zone.”