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Many investors believe that politics do not influence the stock market. They like to keep a distance from the liberal-conservative or the Democrat-Republican debate. While it is acceptable to not be a part of the daily debate, one must not ignore the fact that a fish can never survive in poisoned water.
So, how can the stock that you choose survive if the policymakers are against it?
The stock market is affected by a number of macro factors. “Macro” means the external and uncontrollable factors that include interest rates, inflation, economic outlook, and changes in policies, and also politics.
Let us see how politics affects your stock with an example.
An investor invests money in the stock of a company. This company is part of an industry which caters to a particular sector. Different sectors constitute an economy. An economy runs on a set of rules and policies which is designed and passed by politicians and policy-makers.
Suppose you put your money in a highly profitable company that manufactures insulin. The government decides that the drug is extremely vital for the people and should be affordable by all. As a result, in order to keep the insulin prices in check, it should fix the price of the drug.
They pass a law stating that all the companies manufacturing insulin should now sell it at a fixed rate. Though this law seems promising for the patients, it can have some serious repercussions:
Result: Increased consumption of the drug coupled with lower profit margin will compel the companies to shut their manufacturing units. This will eventually lead to a shortage of the drug. Since the price is fixed and companies are ready to shut their units down, this means more number of people will be laid off. Eventually, people will lose jobs, manufacturing units will shut down and the insulin-making industry will vanish.
This is just one example of price control that can compel even the profit making companies to close. Price Controls are usually put in effect because the government wants to prevent:
There are other ways in which the policies and regulations can affect the company or the stock market. It is important for an investor to foresee the reforms in order to make a wise decision. Before investing your money, make sure to check all the criteria mentioned below:
Other factors like war or natural disasters can also drastically set the economy in turmoil.
Whether you like politics or not, it is going to influence your stock. So, you certainly cannot avoid it. As a wise investor, you should foresee how government policies could trigger the movement of your stocks that you hold.
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.