10 Significant Risk Factors When Investing in a Company

Regulatory Pressure
Jon Leibowitz, chairman of the Federal Trade Commission (FTC), and Julie Brill, FTC commissioner, participate in a briefing on electronic data collection on Capitol Hill. Mark Wilson/Getty Images

In the United States, Congress writes laws intended to protect the environment, consumers and investors. It is the task of regulatory agencies like the Environmental Protection Agency, Federal Trade Commission and the Securities and Exchange Commission to enforce those laws, which can include filing lawsuits against companies that violate federal regulations. Individual states have their own regulatory agencies, which enforce their own standards according to state law. A savvy investor scans the business news to keep tabs on proposed regulations that could affect entire industries.

When there's a shift of political power at the state or federal level, the priorities of regulatory agencies can also shift. The energy sector is a great example. Eric Cantor, a Republican Congressman from Virginia, believes that overzealous environmental regulations proposed by President Barack Obama threaten the profitability of the coal, natural gas and auto industries [source: Cantor]. On the flip side, some economists see environmental regulation of the energy industry as a force for innovation, spurring investment in alternative energy sources [source: Hilzenrath].

Regardless of your political or economic opinion of regulations, you need to analyze the potential risks associated with increased or decreased regulation to the profitability of your target company and make the smartest bet possible.

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