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Legislative Risk
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Legislative risk is the potential of sustaining a loss on an investment as a result of government action. Legislative risk typically implies an amendment, inaction or abolition of one or more laws that may directly impact a given investment. Commonly, legislative risk applies to tax or investment law. Legislative risk may also be eminent in highly regulated industries. Although legislative risk usually applies to government’s propensity to affect investments on the domestic front, investors face financial adversity when investing in many foreign companies and securities as well. Foreign legislative risk, also known as political risk, is an important issue when it comes to nations with unstable governments. Thus, second and third world countries that may often change policies and undergo political transformation are prone to political or legislative risk.
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