Stock markets and global events

There is a lot of shortterm volatility in the global and domestic markets, based on the events and developments in the US market. For example, the news related to the crisis in the sub-prime lending market in the US, interest rates cut by FED, rise/fall in NASDAQ and NYSE etc. These are some fundamental reasons why global markets turn volatile because of developments in the US markets .

The US economy is the largest economy in the world. Many small and large countries mainly depend on exports to American markets . As a result, whenever there is any negative news in the American markets, it triggers negative sentiments among the global investors and as a result we see a lot of volatility in global/domestic markets (especially in the short term).

The Indian economy is mainly driven by domestic consumption, but US accounts for a large portion of exports. A large number of Indian companies are involved in exporting their products to American markets , and raising funds by listing on the New York Stock Exchange (NYSE) and NASDAQ. The percentage of revenue of these companies coming from American markets is growing year over year. Therefore, share price movements of these companies are more likely to be affected by developments in the world economy.

Many foreign investors and funds have made significant investments in India. Investment decisions of these funds are driven and depend on the developments in foreign markets (or their own local markets). As a result, domestic markets are integrated with movements in American stock markets. Market analysts track these global events and market movements very closely.
Opening up of the economy also reduced price differential of a product or service that was present in the closed economy. For example , prices of petroleum products, airfare, steel etc were controlled by the government . The prices of these commodities are now governed by the global markets, and hence are more likely to be affected by developments in the world economy.
We have seen a lot of changes as a result of globalisation and opening up of our economy. Globalisation brought a lot of prosperity to investors, but it also has added a certain amount of volatility to the markets as the parameters that impact the businesses are increasing .
As we are getting more global everyday, firms and investors need to understand the world economy and financial markets better in order to respond to the new realities of India as an open economy. However, strong financial systems and relatively less dependence on external demand for growth are some of India's key advantages.

As a result, Indian markets are much better placed than their counterparts in the rest of Asia. Investors can identify 5-8 fundamentally good stocks in the market and invest whenever there is a sharp correction. Investors should not look for shortterm gains in the markets.

Markets are quite volatile and risky in the short term. Investors should look for medium to long term (one year or more) investment horizons when investing in stock markets. Remember, investments in stock markets require a proper analysis based on the investor's financial goals and risk appetite. If you cannot afford to do that, you are better off investing your money in diversified mutual funds.