Sometimes it's good to stop and think about the things in life we tend to take for granted -- or ignore entirely. We Fools have written often about the various risks companies face, including perils as unorthodox as natural disasters. But there's also another potential pitfall we tend to subconsciously scorn: legal interference.
For example, tobacco companies such as Philip Morris (NYSE:PM) or Reynolds American (NYSE:RAI) face the risk of widening bans on smoking, or the potential that tobacco might one day be outlawed entirely. Depending entirely on a product that's suddenly become illegal could definitely hurt a company's shares.
Similarly, suppose that in order to save some investors from themselves, the government passed a law prohibiting people from trading stocks more than twice a day. Imagine the crimp that could place on the coffers of brokerages such as TD AMERITRADE (NASDAQ:AMTD) or E*Trade Financial (NASDAQ:ETFC).
And if the FDA declared all known sugar substitutes unsafe, Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP) would surely suffer.
Such business-altering legal restrictions are not as unthinkable as you might assume. Earlier this month, Arizona and Ohio voters approved measures to restrict payday loans. In Ohio, the interest rates for such loans were capped at 28%. That was enough for Cash America (NYSE:CSH) to announce that it was closing 43 Ohio branches. More than a dozen other states already have limits; elsewhere, these payday lenders' interest rates often top several hundred percent per year.
Remember, all investments have risks, from real estate to foreign stocks to retirement. It's your job to prepare for these dangers ahead of time. Don't let risks scare you away from investing; just be prepared to meet them head-on, should they become reality.
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