4 points to note before investing in red hot lithium stocks

Jon Smith notes the high interest in lithium stocks at the moment, and so explains what he looks out for when trying to decide where to invest.

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Lithium stocks are catching on to be one of the hottest sectors in the stock market. Given the broad use of lithium in commercial enterprises, this makes sense. However, given such a range of possibilities, I need to be careful about making generalizations about where to invest my money. Here are a few points that I’m noting down before I take the plunge.

Back to basics with lithium stocks

The first point worth noting down is what exactly lithium can be used for. Lithium is a chemical element in the form of an alkali metal. It is a highly reactive element and a good conductor of heat and electricity. As a result, it can be a popular flux additive for iron and steel production. The other major use of lithium is in batteries. This use is the one that’s catching investors’ attention.

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For example, electric vehicles (EV) make use of lithium and lithium-ore batteries. This is because they offer good performance, long life, and can be charged relatively quickly.

So the second point regarding lithium stocks is to check what part of the sector is being serviced. Battery manufacturers could be the place to be, given the potential high demand for batteries if the EV market continue to grow. One of the largest lithium-ore battery manufacturers in the world right now is Tesla. Buying shares in Tesla would combine both the lithium stock and the EV stock sectors.

Choosing which part of the sector to go for

The third point to consider is at what vertical do I want to invest in a lithium stock. I could buy shares in a company that mines lithium and other elements, to sell on. Or I could go further down the line and buy shares in an EV company that uses the finished output.

Personally, I’d prefer to split my investment up into a mix of lithium stocks, given the risks involved. Yet if I could only invest in one area, I’d go for the miners. I feel this gives me the cleanest exposure to a potential surge in demand for lithium in years to come. It also doesn’t make me dependent on what the end use is for. It could be for car batteries, phone batteries, additives for steel production, or other things.

An example in this area is Kodak Minerals. The company has an advanced lithium project in Mali.

Noting the risks

The final point to note with lithium stocks is that the sector is high risk. Many of the stocks that fall into this category are exposed to the price movements of lithium. Further, constant development is going on with batteries, which may render certain firms useless in the future depending on their operations. Finally, given the high interest already being shown, accurately valuing the share prices of these companies is difficult given the number of speculative buyers in the market.

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Jon Smith has no position in any firms mentioned. The Motley Fool UK has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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