Friday, 16 November 2012

The Economic Ecosystem

Why to invest in stocks? This is the nagging question that arises time and again on the mind of any beginner to stock markets. Its our hard earned money and we need to invest it safely. As a beginner to stock investments you need to be clear about two things.

  • We need to be safe with our investments.
  •  We definitely need to invest. Putting it in another way, we cannot let our money stagnate in a savings account, doing nothing with it.

Now as a beginner to stock markets, you will ask, why stocks? We have tried to answer that in our section on Stocks for Beginners. But, if you still need some convincing, this article is for you.

First some recap.

The year 1991 is generally regarded as the start of economic liberalisation in India. So, there is always a before and after 1991, when it comes to the economics. The policy changes at that time changed the way we lived, we earned and we spent. Between 1991 and 2001, the country's GDP increased from USD200 billion to USD 400 billion and till the 2011 the GDP has increased to USD 1.85 trillion. The liberalisation policies resulted in many industries prospering, which gave rise to more employment. This resulted in more spending power which in-turn led to more consumption of products produced in the country. This inevitably led to increase in the GDP. As the nation grew the people who took part in the nation’s growth also prospered. Many of the companies and corporations which started then and grew into big bluechips today are testament to the fact.

As beginners to stock investing, you need to understand this interconnected process leading to the nation's growth clearly. This is the step one of learning to invest. You need to understand that you are a vital part of this growth story and you too can benefit from this overall growth. This will give rise to the realisation that stock market investments are neither too risky nor a gambler's whimsy, as it is made out to be. There is method to such investments and if you learn to invest correctly, you can benefit from stock market.

India is a Consumer based economic ecosystem and approximately 57% of GDP is due to consumption.

So lets understand the Economic Ecosystem 

Economic Ecosystem Infographic

Let us try to understand the cycle from the perspective of the Consumer who is the most important node of the cycle. The consumers are people like you and me.

  • Increase in the consumption base/consumer power, means more potential demand for the products and services.
  • The increased demand has to be met by scaling-up the supply.
  • Increased supply (manufacturing/scaling-up) can be achieved by employing more manpower.
  • This leads to more employment.
  • This results in more income in-turn increasing the ability to consume. This increases demand further repeating the cycle over and over again.
  • All this leads to economic growth of the country (increase in GDP).
  • Economic Growth leads to the need to create new policies to keep with the times. Invariably these will be predominantly positive to the industries so that they can increase their activities and lead to further economic growth.
  • This again gives rise to many new industries/companies engaged in manufacturing and services.
  • This too leads to rise in employment and giving more means of income.
  • Again the potential consumer base will increase due to more income earning.
  • Also the new companies/services will cater to the consumer base directly. The cycle is looped into itself and keeps repeating in a well lubricated economy driven by good policy reforms and govt. initiatives.

Now switch over from the consumer’s perspective into the service provider’s perspective.

Assume that you are an entrepreneur. You have a brainwave of an idea and put it into a good business model. There is a market for your product or service and in course of time, your business gets established. To meet the increasing demand you scale-up/expand which in addition to catering to the increased consumer base also gives you good returns in terms of profits, creating your wealth.

But not all of us can be entrepreneurs. The next best thing to do is to invest in a good company/venture. Then the same cycle of consumer/provider relationship will lead to wealth creation for the investor too. That is what stock investments are all about and that should answer your question on why to invest in stocks.

That is the reason why we go with the sector>company>market approach. Every company that we review has relevance to the consumer and hence has potential for growth. Even MindTree, which does not produce anything that we directly consume, is also affected by the cycle above. Being in the IT services industry, it caters to the demands of the companies who always are trying to streamline their processes with the help of IT and ITeS. This gives rise to potential growth of the business and good returns for somebody who invests in the stocks of the company.

We sincerely believe that what has been said above, dispels the the misconceptions that lurk in the minds of beginners and they take to investing in good stocks in the right spirit. Of course RupyaGyan will continue to provide you with good guidelines to make you wise investors.