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How to Identify the Effects of Politics on Stock Investments

Before and after election time, investors must keep a watchful eye on the proceedings. For stock investors, politics manifests itself as a major factor in investment-making decisions in many ways.

Possible Legislation Effect on Investing
Taxes Will a new tax affect a particular stock (industry, sector, or economy)? Generally, more or higher taxes ultimately have a negative impact on stock investing. Income taxes and capital gains taxes are good examples.
Laws Will Congress (or, in some instances, state legislatures) pass a law that will have a negative impact on a stock, the industry, the sector, or the economy? Price controls — laws that set the price of a product, service, or commodity — are examples of negative laws.
Regulations Will a new (or existing) regulation have a negative (or positive) effect on the stock of your choice? Generally, more or tougher regulations have a negative impact on stocks.
Government spending and debt If government agencies spend too much or misallocate resources, they may create greater burdens on society, which in turn will be bearish for the economy and the stock market.
Money supply The U.S. money supply — the dollars you use — is controlled by the Federal Reserve. It’s basically a governmental agency that serves as America’s central bank. How can it affect stocks? Increasing or decreasing the money supply results in either an inflationary or a deflationary environment, which can help or hurt the economy, specific sectors and industries, and your stock picks.
Interest rates The Federal Reserve has crucial influence here. It can raise or lower key interest rates that in turn can have an effect on the entire economy and the stock market. When interest rates go up, it makes credit more expensive for companies. When interest rates go down, companies can get cheaper credit, which can be better for profits.
Government bailouts A bailout is when the government intervenes directly in the marketplace and uses either tax money or borrowed money to bail out a troubled enterprise. This is generally a negative because funds are diverted by force from the healthier private economy to an ailing enterprise.

When many of the factors work in tandem, they can have a magnified effect that can have tremendous consequences for your stock portfolio. Alert investors keep a constant vigil when the legislature is open for business, and they adjust their portfolios accordingly.

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