Before you leap into resources shares, consider these six disadvantages

Julie Brownlee, Fsp Invest, 13 May. 2014

Tags: resources shares, buying resources, shares, investing in resources shares, disadvantages of resources shares, disadvantages of investing in resources shares

You may think that investing in a resources company is a better option than investing directly in a resource. You may get a dividend. And you may get capital appreciation as the share price rises. But before you jump in, there are several disadvantages that you need to consider first. Let’s take a closer look…

Disadvantage #1 of investing in resources shares

Buying resources shares comes with a host of risks as with any investment. You take on the risks associated with mining and any company specific risks.

These risks could put pressure on the share price and profits. There’s also the chance that the company will drill unsuccessfully or at higher costs than the company makes in return.

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Disadvantage #2 of investing in resources shares

If you’re looking to invest in gold mining companies, then deep-cast mining is involved. This requires massive capital investment.

Opting for companies with opencast mining of its resources is cheaper. But in turn, the resource isn’t as valuable.

Disadvantage #3 of investing in resources shares

Beware of investing in small resources shares. They may be illiquid. This means it could prove hard to sell your shares.

Disadvantage #4 of investing in resources shares

Accidents unfortunately do happen in this type of industry. If your resources company suffers with an accident, the effect on production can be large. This would reflect in the company’s share price.

Disadvantage #5 of investing in resources shares

Resources companies aren’t just following the relevant metal prices. They also are sensitive to a number of factors like interest rates, current stock market conditions and a whole host of other factors.


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Disadvantage #6 of investing in resources shares

If you invest in the larger resources companies, you’ll be getting exposure to a wide number of resources. You may find it hard to invest in a company that produces a specific metal, for example.

Mining and resources companies also come with some ethical concerns. This might put you off investing in them.

So there you have it, six disadvantages to consider before you leap into resources shares.

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