What are gold stocks?

Investors are always on the lookout for investment opportunities that deliver steady returns while avoiding significant risk — especially in a turbulent economic climate like we find ourselves in today.

One such opportunity is gold stocks. Gold has been regarded as a store of value and safe-haven asset for centuries, delivering reliable returns throughout periods of economic turmoil. And buying gold stocks can be an easy way to invest in this precious metal without the hassle and cost of owning it physically.

Of course, as with any investment, it's important to know how gold stocks work and the advantages and disadvantages they come with. This will enable you to make a more informed decision about whether to add this asset to your portfolio.

Learn more about gold investing with this free information kit.

What are gold stocks?

Gold stocks are shares of companies involved in the exploration, extraction and production of gold. When you invest in gold stocks, you're entitled to a portion of the revenue these companies generate, so you're essentially betting on their performance.

The value of gold stocks is based on several factors, including gold prices, production costs, supply and demand and the company's overall financial performance.

Types of gold stocks

There are three main types of gold stocks:

• Mining companies: Gold mining companies are directly involved in exploring for gold, developing mines, extracting gold from the earth and selling it.
• Streaming and royalty companies: Streaming and royalty companies do not own mines themselves. Instead, they pay existing mines for a percentage of their revenue (for royalty contracts) or the right to purchase gold from them at a discount, which they can then sell at current market prices (for streaming contracts).
• Exchange-traded funds (ETFs): Gold ETFs are pooled investment funds that hold a collection of gold assets, either stocks or physical gold. These funds are traded in exchanges just like stocks and track the performance of gold stock indexes.

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Pros and cons of gold stocks

When deciding whether gold stocks are right for you, keep the following advantages and disadvantages in mind.

Pros

There are many benefits of investing in gold, including portfolio diversification, hedging against inflation and protection from economic uncertainty.

While you can enjoy these benefits with any type of gold investment, gold stocks' value isn't based solely on gold prices. It's also based on how the gold companies you've invested in are performing. As a result, gold stocks offer the potential for gains above and beyond any increases in gold prices.

In addition, gold is an asset that's always in demand. It's used as a currency, investment and an element in a variety of products, from jewelry to electronics. No matter what the economy is doing, there will be a market for gold. 

And when the economy is shaky, gold tends to be even more valuable. This can make gold stocks a smart choice over other stocks that can suffer sizable losses based on everything from economic downturns to shifts in consumer sentiment.

Finally, some gold stocks pay dividends, which can provide you with a passive income stream while you hold them. Other gold investments, such as physical gold, only pay you when you sell them.

Cons

Gold stocks may provide higher returns than other gold investments, but they also carry greater risk. Stocks are a volatile asset that's highly dependent on everything from geopolitical tensions to production-related issues or poor company management.

As a result, it's essential to thoroughly research a company's financial health, management team and growth prospects before buying any gold stock.

The bottom line

Investing in gold stocks can be an easy way to add gold to your portfolio while potentially enjoying higher returns than with other gold investments. 

That said, you should understand the risks involved, carefully research any stock you're considering and have a well-planned investment strategy so you can make the most informed decision. A financial advisor can help you create a portfolio that aligns with your goals and risk tolerance.