Top-down and Bottom-up approach of investing in share market

Investors in share market choose different approaches for their investment. These approaches are defined based on the choices that they make while picking up stocks. Some investors base their stock picking decisions on the basis of company’s performance and how well they can perform in future. Some others use to look at bigger economic performance and then based on that look for the companies to invest.

There is no right or wrong approach of investing. You cannot say which approach will work for you and which are not. You can get good return out of your investment if you develop your own system of investing. Now let us discuss two most widely used methods of investing in share market; 

Top-Down Approach

Top-down and Bottom-up approach of investing in share marketTop-Down is a broader approach wherein investor or fund manager use to first determine the industry or sector that will outperform others. Based on their forecast they use to select stocks from those sectors for their investment.  If such investor or fund manager forecasted a weaker economy then they may decide selling their investments for a better return by investing in defensive sectors.

As it starts from the top, you have to first look into the global economic performance and then within that how developing countries and emerging markets are performing. You can estimate economy performance of a country by predicting its GDP growth based on past record and future prospects. Some other things that you need to look at in addition to GDP is increase or decrease in interest rates, inflation and employment

Bottom-Up Approach

Top-down and Bottom-up approach of investing in share marketIn Bottom-up Approach, investors use to first look into the company’s fundamentals and then to the global economy before taking their investment decisions. In this approach, investors or fund managers use to ignore growth of the economy or industry and concentrate on company’s overall strength.

Rising uncertainty in market may force investors in selecting bottom-up approach wherein they pick up stocks with decent earnings growth, stock management and sound balance sheet. Price to earnings, price to sales and dividend yields are some of the other factors which investors look at while selecting company’s stock in bottom-up approach.

As financial experts suggest, every approach has its own pros and cons so one should not base their decisions on one approach. You need to build your own approach of investing that best fits your goals and objective.

Editorial Staff at Yourfinancebook is a team of finance professionals. The team has more than a decade experience in taxation and personal finance.