INTRODUCTION TO THE INVESTMENT ENVIRONMENT

Among these markets we have the securities market, with its regulator (SEBI), the trading platform and its systems (stock exchanges), its agents (brokers) and its many participants (including corporate, financial institutions both domestic and foreign, mutual funds, insurance companies, banks and individual investors). Here again it is a question of demand and supply of various commodities, products & services and trading instruments. And the analysis would encompass the demand-supply match/mismatch.

It would be advisable to note at this stage, that due to the liberalization process undertaken by India over the last 18 years, we are today in an environment where events that take place in other parts of the world have a direct or indirect effect on our economy. This would further effect the specific market and finally would have an effect on the equity market.

Let us visualize a scenario of an industrial slowdown in the U.S. Amongst other things, this would have a direct bearing (i.e. a reduction) on the demand of steel. To protect its own domestic steel industry, the U.S. government would temporarily introduce trade barriers on steel imports. This in turn would cause a reduced export of steel from India to the U.S., causing a temporary over supply of steel in the domestic market. The steel manufacturers would have to tackle the higher levels of inventory and its associated costs. In the domestic steel market, even if the demand were constant, the excess supply would cause a reduction in the price realization per marketable ton of steel. This in turn would directly effect the incomes and profit margins of the steel manufacturers. Such a situation would temporarily cause a drop in the share prices of steel stocks in the equity market.

This example is to describe to you how logical the sequence of events is and what the end result would be. However, this sequence does take a long duration of time to unfold, sometimes may even take years.