How to . . . invest in silver Silver may be dubbed the "poor man's gold" but it has the potential to provide big profits in the coming years, if the precious metal's bulls are to be believed. Last week, one fund manager predicted that silver will rise by over 400 per cent to $165 an ounce over the next three years. Like gold, silver tends to perform well during periods of quantitative easing as investors search for real assets to hold. But silver prices are even more volatile than those of its more expensive cousin. How to... Between June and October, the grey precious metal rose by 50 per cent to $35 an ounce, before falling to $33 an ounce today. Last year, many investors had their fingers burnt when the price of silver touched 30-year highs before plunging nearly 35 per cent in just a fortnight. And like all commodities, silver produces no income. Buy coins or bars Holding physical silver is one of the safest forms of exposure for those looking to hedge against inflation and diversify a portfolio away from equities. Silver bars and coins can be bought and sold through bullion dealers. Popular coins include the American Eagle, the Canadian Maple Leaf and the Britannia. Silver bars come in a range of different weights. It is worthwhile considering carefully how you buy your silver. Although individual coins are much cheaper than gold ones, they are subject to VAT, which gold coins aren't. Retail dealers will also typically charge a premium above the spot prices, so it is worth shopping around to get the best price. Buying on the wholesale market can be cheaper, but is only an option for those looking to buy large 1,000 ounce silver bars (around £20,000, at current prices and exchange rates). The internet and fractional ownership has opened up this market to private investors through groups such as Bullion Vault (www.bullionvault.com) and ATS Bullion (www.atsbullion.com). According to Adrian Ash, head of research at Bullion Vault, a big advantage of buying silver wholesale is that it is not subject to VAT as long as it is held as professional-grade metal inside accredited storage by a member of the London Bullion Market Association. (www.lbma.org.uk). Exchange traded commodities Another way to gain exposure is by investing in an exchange traded commodity (ETC), products whose performance is linked to the price of silver. These come in two types: ETCs that are physically backed by holdings of gold or silver in vaults and synthetic ETCs, which use swap arrangements to replicate the returns of the physical market. Most advisers recommend opting for a physical silver ETC because of the counterparty risks involved with swap-based products. ETCs offer the benefit of low management fees - typically about 0.4 per cent to 0.5 per cent a year - and the liquidity of a share traded on the London Stock Exchange. They can generally be held within Individual Savings Accounts (Isas) and Self Invested Personal Pensions (Sipps). Two examples of physical ETCs are iShares Physical Silver ETC (SSLN) and ETFS Physical Silver ETC (PHAG). These have management fees of 0.4 per cent and 0.49 per cent a year, respectively. Nik Stanojevic, analyst at wealth manager Brewin Dolphin, says investors need to also factor in other costs such as broker fee to buy and sell the ETC and the tracking error, which can be between 0.5 per cent to 2 per cent per year for these type of products. Buy silver stocks Private investors can buy shares in companies that mine silver. One of the world's largest silver producers is Fresnillo (FRES), a Mexican company listed in London and a member of the FTSE 100. Another popular silver stock is Hochschild Mining (HOC), a Peruvian silver producer. However, experts warn that buying silver mining groups comes with a number of risks, such as operational and geopolitical, and therefore isn't a straight play on the price of silver. They also tend to be smaller - and more volatile - companies than other mining groups. "There would be the real chance that like many miners of precious metals, the company will miss production targets and suffer from idiosyncratic risks," says Thomas Becket, chief investment officer of Psigma Investment Management. Another way to get exposure to the precious metal is through a silver streaming company. These companies do not mine their own silver but buy the long term production of different mines at a fixed price and sell it at the market price. Silver Wheaton (SLW), a Canadian-listed stock, is one such outfit. "Buying a silver streaming company means you are not exposed to the costs associated with production and gives investors a purer exposure to silver price," says Catherine Raw, co-manager of the BGF World Mining Fund. Invest in a precious metal fund Buying an actively-managed fund offers some diversification and the prospect of higher returns, as a fund will typically invest in mining company shares. However, the downside is that funds investing in stocks will be more affected by stock market sentiment. Fees will also be higher than buying an ETC, with many carrying a 5 per cent initial charge (often waived) plus management costs of around 1.75 per cent a year. They're not a very clean play, either, since they invest in a range of mining companies, not just silver miners. Despite this, Darius McDermott, managing director of Chelsea Financial Services, the financial advisory firm, says managed funds are his preferred route to invest in silver. "The cost of these funds will generally be higher than ETFs but with a little research you can find a decent fund manger who really knows what to look for and when to move overweight or underweight an asset, rather than just tracking a market and hoping it goes in the right direction," he says. He recommends Way Charteris Gold, BlackRock Gold & General (14 per cent in silver) and Smith & Williamson Global Gold & Resources fund (25 per cent in silver, platinum and diamonds). Trade silver futures Silver futures contracts were originally designed to protect large industrial users of the grey precious metal from adverse price swings by enabling them to obtain or supply a steady quantity of silver at established prices. But private investors can use silver futures to bet on the near term direction of the price of silver, buying when they believe the price of the metal will rise and selling when they think it will fall. Similarly, spread betting, options and contracts for differences can also be used by private investors to speculate on the price of silver. Speculating on futures will attract sophisticated investors happy to use leverage for potential big gains. But leverage and volatility can be a fatal combination. "There can be a significant amount of leverage involved and I would exercise extreme caution before taking this route, as it is highly speculative," says McDermott.