PoliticalGovernmental Risk

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Political/Governmental Risk

The American government is about as stable as can be. Other governments around the world aren't quite as lucky, however, and the strange things that foreign governments do can absolutely affect stock investments. The most obvious risk is to those investors who have invested in stock markets in other countries , but the effects of political and governmental risk go way beyond direct cause and effect.

For example, say you have invested in the good old American Widget Company because you don't want to deal with the headaches of international investing. You don't care that the government of North Svengobia has just sealed its borders to all trade with the United States over a territorial dispute. Did I mention that North Svengobia is the only country in the world where the Widget flower, which is so important in the production of Widgets, grows?

TIP

Political and governmental risk is the danger that decisions by governments over which you have no control will have ramifications that will affect your stock domestically.

This is a very real example. There were some very unhappy pistachio nut investors in the United States when Iran stormed the U.S. embassy in the 1970s, effectively destroying all diplomatic relations with the United States and severing a supply line of pistachio nuts. Other examples of political and governmental risk that would affect American investors include unstable exchange rates, nationalization of industries, and trade agreements such as NAFTA. As increasing globalization causes our world to continue to shrink, the power of governmental and political risk will only grow larger.

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