How to Invest in Royalties

Woman recording song in sound studio
Image Credit: Wavebreakmedia Ltd/Wavebreak Media/Getty Images

A royalties is a form of compensation paid each time an income-generating goal is reached. For example, an author might receive a royalty for copy of his book sold. In investment circles, royalties most often are received from natural resource-producing ventures, such as mines and oil wells. In exchange for an investment of cash, investors are entitled to compensation each time a specific amount of the resource is collected. Investing in royalties is relatively simple, requiring only cash.

Step 1

Choose a commodity that is mined or extracted. Often, the royalty is pegged to the prevailing market price of the commodity. As the price of the commodity goes up, the payment rises. For this reason, investors should choose a commodity they believe will appreciate. For example, if you believe the low price of oil is preventing oil companies from investing in new wells -- which could trigger a supply glut and a rise in the commodities price several years down the line -- you may want to choose crude oil.

Step 2

Identify companies actively harvesting the commodity. Most commodities, depending on their scarcity, are harvested by a few dozen to a few thousand different companies. Only some of these, however, are willing to sell royalties to investors. Consult a commodities trading adviser for additional information.

Step 3

Research different producing sites. Each company that offers royalties will have one or more producing sites. Ask the companies for information about sites' production histories. This will give you some idea of the relative risk of the investment. For example, a new oil well that is not yet actively producing is generally a far riskier bet than a well with a steady history of production.

Step 4

Approach the companies about royalties. Generally, companies that issue royalties will have set rates at which they are willing to grant investors rights. However, some are willing to negotiate. Read any contract that the company provides you before signing it. If you have difficulty understanding anything, consult an attorney with experience in mineral rights law.