Top Down and Bottom Up approach of Stock Investing: While performing the fundamental analysis of companies, share market investment. Two of the most common strategies to research stocks that are used by investors are top down and bottom up approaches. In this post, you’ll learn what exactly is top down and bottom up approach.
Here, we’ll learn how top down and bottom up approach work, the difference between them and which one may be more suitable to you. Let’s get started.
Top down approach | share market investment
Have you ever heard any investor/analyst saying something like- “The electric vehicle industry looks particularly promising now. The industry is growing at a fast pace and I should invest in this industry”.
Well, here the investor is following the top down approach to find stocks.
In the top down approach, the investors first look into the macro picture of the economy and later work down to research the individual stocks.
The overall steps involved in top down approach is to first look at the big picture of the world i.e share market investment. Which economy is doing great, then look at the general market in that economy, next find the particular sector that may outperform and finally research the best stock opportunity to invest within that sector.
Bottom up approach
This approach is exact opposite of the top down approach. Here, you first start with company research and later move up to find the other details.
Bottom up approach tries to study the fundamental of the company regardless the market conditions share market investment. Industry or the macroeconomic factors. While performing the bottom up approach, the investors studies how fundamentally strong the company is by focusing on its revenues, earnings, financial ratios, products/services, sales growth, management etc.
The key here is to find the potentially strong company which may outperform the industry and market in future. If the fundamental factors are good, then regardless of what the industry is doing, the bottom up investors will pick such companies to invest.