Top-Down vs. Bottom-Up: What’s the Difference?
Here, you start with the big picture and ultimately move down to find the suitable investing opportunity. Top down approach looks at the performance of the economy & sector and believes that if the industry is doing good– the chances are that the stocks in that industry will perform too. For example, let’s say you studied that the European economy is growing at a very fast rate. Next, when you looked further into the European market, you found that especially the biotechnology industry in outperforming. And finally, you researched some appealing stocks in that industry to invest.
Here investors give due weightage to the economy and the industry segment, besides focusing on the best-performing companies in that segment/sector. The term “bottom-up” describes a particular approach to investing. Bottom-up investors are more interested in the analysis of a given company’s performance, regardless of trends in the overall market. As noted in “The Theory and Practice of Investment Management,” bottom-up investors are also characterized as those who focus on technical analysis of particular stocks. In accounting and finance, fundamental analysis is a method of assessing the intrinsic value of a security by analyzing various macroeconomic and microeconomic factors.
