If you buy shares in gold stocks, it will most likely be in a mining company. Trading stocks in gold can be advantageous during time of economic downturns, or where there are economic uncertainties. The reason behind this is because during these periods, investors move money out of stocks and buy up gold as a hedge.

Gold prices are driven by supply and demand, and when investors start buying up gold, the prices start to rise. It was estimated that all the gold ever mined until the end of 2009 weighed in at 165,000 tons. To put this in perspective, if you collected all the gold mined it would make a cube of approximately 20.4m.

With the price of gold rising due to demand from investors, the mining companies should be able to make increased profits from the increase in the price of gold. If as an investor your stock picks include gold stocks, then you will be investing in mining companies.  It is important that you perform fundamental and technical analysis of the mining company and its share price. In the stock market today, there are many mining companies that you can choose from, and unless you have a broker who gives you stock tips, you will have to monitor the price of gold on the market.

It is not always the case that a mining company’s share price goes up with an increase in gold prices. That is why when you are stock picking gold stocks, you need to perform fundamental analysis to help determine the company’s future and profitability. It is important to look at the management and see if they are competent to lead the company. Looking at the past history of other companies or their educational background is important. Especially important is the competition that the company faces in its sector. Information on its financial operations should be looked into closely. Forward P/E ratios are an important way to know the estimated net earnings of the company.

Investing in gold stocks is a good way to diversify your portfolio and take advantage of the increase in gold prices without actually physically owning it.  Gold shares are regarded as speculative as they carry a high risk high reward scenario. You can expect higher returns from a mid to large cap mining company that has proven reserves, strong earnings, impeccable balance sheets, and a competent management team.