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.
For lots more investment tips and financial information, check out the related HowStuffWorks articles below.
Author's Note: 10 Significant Risk Factors When Investing In a Company
If the Great Recession has taught us anything, it's that there is no such thing as a safe bet. I think about my parents, baby boomers who dutifully squirreled away money into their 401(k) plans and Roth IRAs, confident that the stock market would continue its upward climb for eternity, or at least until they were safely settled into retirement bliss. But all of the talk of the market's average long-term returns didn't mean squat as my parents saw their hard-earned next egg lose half its value from 2008 to 2010 and their retirement dreams began to look more and more like a fantasy. The lesson, I suppose, is that we all need to be aware of the significant financial risks we take with any investment. Yes, there are tremendous benefits to 401(k) plans and managed mutual funds, but none of us should act on blind faith that stock markets always grow, home prices always increase, or natural disasters never happen around here. Better to be educated, prepared and in control. That won't take away the risk, but at least we'll have a plan B.
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