How to Invest in Silver the Right Way

By Dan Caplinger Markets Fool.com

The silver market has been volatile over the past 20 years, with a huge bull market that ran throughout most of the 2000s and early 2010s giving way to a big pullback in recent years. Now, however, some see silver as an investment that could take advantage of industrial demand, especially if new supply gets constrained by lower prices. Yet many don't know how to buy silver or why investing in silver can be lucrative. By understanding how you can invest in silver, you'll be in the best position possible to decide whether it's the right move for you.

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Buying actual silver

The clearest way to invest in silver is to go out and actually buy the physical metal. Bullion silver is available in coin and bar form, and most coin dealers and precious metals dealers will offer silver bullion in various sizes and formats. Typically, you can find coins and bars as small as a single ounce, or large bullion bars as big as 1,000 ounces.

Owning silver bullion has the advantage of having its value track the market price of silver directly. However, there are a number of disadvantages. First, you'll typically pay a slight premium to buy silver from dealers, and you'll often have to accept a slight discount when you decide to sell it back to your dealer. If you expect to hold onto your silver for a long time, then those costs aren't monumental, but for those who want to trade frequently, they're typically too costly to bear several times in close succession. In addition, storing bullion involves some logistical challenges and added costs.

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Buying silver ETFs

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For traders, exchange-traded funds that themselves own silver offer an effective substitute to owning bullion directly. Each share of a silver ETF corresponds to a certain notional amount of silver, and the prices of ETF shares typically track silver prices fairly closely. Like any mutual fund or ETF, silver ETFs have expenses that get charged through to shareholders, but they tend to be fairly modest. The iShares Silver ETF (NYSEMKT: SLV), for example, charges an annual expense ratio of 0.5%.

Some investors don't like silver ETFs because they don't give you actual possession of silver. In addition, ETF shares can trade at a premium or discount to the actual value of silver, leading to some discrepancies depending on when you trade shares. However, for ease of trading, the ETF shares allow you to participate in the general movements of the silver market.

Silver mining stocks

Another way to invest in silver through the stock market is by buying shares of silver mining companies. Silver mining stocks usually rise in value when silver prices go up and fall when silver performs poorly. Often, for a given price increase in silver bullion, mining stocks will climb several times that amount in percentage terms. However, the challenge with silver miners is that you also have to deal with the risks involved in actually operating a mining operation. Sometimes, an accident at a mine or a bad result in exploring a potential property for silver will result in bad performance from a particular company, even if the silver market is generally strong. That company-specific risk is hard to hedge against, although owning baskets of mining stocks can offer some protection.

Silver streaming companies

Finally, investors can choose to buy shares of silver streaming companies. These companies don't run mining operations themselves but rather offer financing to miners, getting back a royalty or streaming interest in their production. Usually, streaming companies are able to buy silver production from their mining partners at a fraction of the current market price, offering them a way to get paid back and earn a profit from their capital. Streaming company stocks therefore rise and fall with silver prices, but they're also affected by the quality of financing deals they can arrange.

What's the right silver investment for you?

The best silver investment depends on your needs. If all you want is perfect exposure to silver as a commodity, then either physical bullion or silver ETFs work well, with the choice depending on whether you want to hold the actual metal for a long time or trade in and out.

For those seeking a return, mining stocks are more speculative, while streaming stocks offer more stability and often greater income. Mining is capital-intensive, and most mining stocks don't pay dividends. Streaming companies, however, often do pay dividends, because as financing companies, they rely on healthy cash flow.

Investing in silver isn't for everyone. But if you believe that the market is ripe for gains, then looking at the companies that have the greatest exposure to silver can give you the biggest profits if your beliefs turn out to be correct.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.