How to Ascertain the Political Climate for Your Stock Investments - dummies

How to Ascertain the Political Climate for Your Stock Investments

By Paul Mladjenovic

The bottom line is that you as a stock investor ignore political realities at your own (economic) risk. To be and stay aware, ask yourself the following questions about the stock of each company in which you invest:

  • What laws will directly affect my stock investment adversely?

  • Will any laws affect the company’s industry and/or sector?

  • Will any current or prospective laws affect the company’s sources of revenue?

  • Will any current or prospective laws affect the company’s expenses or supplies?

  • Am I staying informed about political and economic issues that may possibly have a negative impact on my investment?

  • Will such things as excessive regulations, price controls, or new taxes have a negative impact on my stock’s industry?

Here’s an example: Oil and gas service and exploration companies benefited from the need of the U.S. for more energy supplies. But investment opportunities didn’t stop there. As overseas oil became more problematic to access (due to shrinking supplies and growing geopolitical tensions), alternative and domestic sources of energy became more desirable.

New sources of energy, such as shale oil, and new ways to extract traditional energy, such as natural gas, ignited an energy boom in the Midwest. Consequentially, the stock of those public energy-related companies did well. The interplay between economics and politics was interesting to view at the state level.

In the midst of a slumping national economy, North Dakota has a booming state economy (fueled by an energy exploration boom operated by the private sector). The state’s unemployment rate has fallen below 4 percent compared to a national rate of more than 8 percent.

Meanwhile, in states like California, the contrast has been stark. In spite of having a large natural supply of energy (such as oil), the state government in California has banned or greatly restricted any companies from exploring this abundant supply. Consequently, many of the firms have left the state to head to friendlier jurisdictions, and the state has dealt with an unemployment rate much higher than the national average.

Regardless of the merits (or demerits) of the situation, investors must view it through the lens of economic causes and effects, which in turn leads to their decisions on which companies (and their stocks) are impacted positively or negatively.