How Politics Affects Your Investments

Politics and governance are strong aspects of a nation. As such, it is impossible for the stock market not to be affected by political issues plaguing the nation as a whole.

You probably already know that the stock market does not exist in a bubble or stand-alone. It is a function of all the economic activities happening in the nation as well as the reaction derived from all investors in it.

Politics and governance are strong aspects of a nation. As such, it is impossible for the stock market not to be affected by political issues plaguing the nation as a whole. There are a number of ways politics affects you as an investor as well as your investments. Here are some of the different ways:

Taxes

The most direct way politics affects your investment is through taxes. These levies enforced by the government typically change over time for better or worse. They could affect specific industries or the entire economy.

They could also either be good where there are incentives in an industry to drive investments) or they could be bad where higher taxes are imposed. In the latter case, income taxes and capital gains taxes could reduce your overall return when higher taxes are levied.

It is thus important to be aware of the tax situation that exists in any industry you’re investing in.

Regulations and policies

Regulations and policies are also created by the government and they are essentially rules or directives that prescribe certain types of conduct. Just like taxes, they could be positive or negative to whatever industry you invest in.

For example, if a new regulation bans the importation of a certain raw material that a company you have invested in relies on, then there will be a negative impact on your investment at least till a new raw material supplier is found.

Naturally, more rigid regulations will cause a negative impact on your stock investments. Policies like price control might also threaten the revenue generation of certain companies. As an investor in the space, it is important to be abreast of regulatory changes, new laws, and policies.

Interest rates

Another way the government and its politics affect investment is in terms of interest rates on loans. The government by its own volition can increase or reduce interest rates and this can have a major effect on the stock market.

Where interest rates on loans are high, it becomes costlier for companies to obtain credit and this might affect the profitability of companies in the market. However, just like other policies, it could also be favorable when interest rates are reduced.

Other ways the politics of a nation can affect investments include the money supply, government spending, governmental investments in specific sectors, bailouts, and so on. Just as the stock market does not exist in a bubble, it is important to keep up with the news of the economy you’re investing in so as not to be blindsided.

Written by Lawretta Egba.