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10 Significant Risk Factors When Investing In a Company


3
Legal Troubles
Meredith Stewart (left), who worked at Enron, sits on her personal belongings in front of the company's headquarters after being laid off in 2001. James Nielsen/Getty Images
Meredith Stewart (left), who worked at Enron, sits on her personal belongings in front of the company's headquarters after being laid off in 2001. James Nielsen/Getty Images

The only thing Wall Street likes less than a poor earnings report is an investigation by the U.S. Department of Justice (DOJ). If you want to avoid a risky investment, steer clear of companies that are under active investigation by the DOJ's Antitrust Division or the Enforcement Division of the Securities and Exchange Commission (SEC). If a company is convicted of deceptive accounting practices, fraudulent reporting of earnings or unfairly squashing competition, that's going to scare away investors and cause the stock price to sink.

Then again, even a major legal judgment doesn't necessarily signal the end. Look at Microsoft, which was convicted in 1999 of violating antitrust laws with its Windows operating system, but paid its debt, restructured its business, and survived on the strength of its sales and continued market share dominance. Some investors actually look to buy stock in an otherwise strong company that's been hit with a legal setback. The trick is to identify the point at which the stock price bottoms out before beginning its rebound [source: Austria Farmer].

Some legal troubles are too big to escape. When government regulators and fraud investigators began swarming the headquarters of energy giant Enron in 2001, it became very clear, very fast, that the former Wall Street darling was never going to bounce back. Investors dumped their Enron stock as fast as they could, leaving latecomers with once "golden" stock certificates that weren't worth the paper they were printed on [source: Kadlec].


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