Buying silver shares: how it works and your options

One of the ways to invest (indirectly) in silver is investing in silver, namely by investing in silver mining shares. For investors who have experience buying shares, this can feel like a logical choice.

But do silver (mining) shares actually align with the goal you have in mind when investing in this precious metal? Or are you unknowingly taking on extra risks that have nothing to do with the silver price itself?

In this article, we clearly explain what silver shares are, what risks they carry, and why more and more investors are choosing to invest in physical silver instead.

What exactly are silver shares?

When someone talks about 'silver shares', they usually mean one of the following three options:

1. Silver mining shares (shares in mining companies)
2. Silver ETFs or trackers that follow the silver price
3. Streaming and royalty companies in the silver sector (these finance mining projects in exchange for the right to buy silver, and gold, at reduced prices, or to receive a percentage of revenues)

Sometimes people don't mean an individual share, but an ETF that tracks the price of multiple silver mining shares. This is also known as a Silver ETF.

The most common form is silver mining shares: shares in companies that mine or process silver.

When you buy a silver mining share, you don't own physical silver. You own a share in a company. A silver mining share is therefore an indirect way of investing in silver.

The price of a silver mining share is indeed linked to the silver price, but is also influenced by:

• The quality and stability of the company
• Operational risks such as technical problems, flooding, collapses, and strikes
• Production costs: the lower the cost per ounce, the higher the profit when the silver price rises
• Geopolitical risks such as mining taxes, political instability, and (environmental) regulation

The same kinds of factors affect gold mining shares.

How does investing in silver mining shares work?

A silver mining company makes money by extracting silver, selling it, and keeping the margin (sale price minus costs) as profit.

When the silver price rises, these companies' profit margins can also increase sharply. As a result, the price of silver mining shares sometimes rises faster than the silver price itself. This is known as leverage.

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That naturally sounds appealing, but the leverage effect also works in reverse. When the silver price falls, profit margins can evaporate quickly. Silver mining shares can then fall much harder than silver itself.

The risks of silver shares

• Business risk: fraud, poor management, or operational problems can undermine the share price.
• Market crashes: in 2008, for example, the silver price fell sharply, but silver mining shares fell considerably harder as investors sold off shares en masse.
• Cost inflation: rising energy and labor costs squeeze margins.
• Political risk: mining depends on governments, and many silver mines are located in politically unstable regions such as Mexico, Peru, and various African countries. New regulations can directly affect profitability — and therefore the price of the silver mining share.
• You don't own physical silver: in times of financial turmoil, the difference between paper ownership and physical ownership is crucial. With a share in a silver mine, you don't own physical silver that you could, for example, have delivered to you. For investors who buy silver as protection against systemic risk, that's a meaningful difference.

Buying silver shares or investing in physical silver?

If you want to invest in silver, there are therefore several methods. Investing in silver mining shares is one of those ways, but investing in physical silver is also a popular choice.

Although both are related to the silver price, they differ fundamentally in structure, risk, and objective. The overview below makes that difference clear.

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