I have seen posts explaining the top down and bottom up analyses by time frames, but that's not correct.
Time frames don't have anything to do with this approach.
If you wish to check out my other educational post on how to properly use the tool (as many people get confused with this as well), click on the post below.
Bottom Up Analysis Explained
- The bottom up method is the method that the majority uses to analyze stocks.
- The investor first chooses a stock that he wants to potentially invest in.
- Then, he analyzes the financials of the company, and compares it with that of other companies in the same industry
- Afterwards, he assesses the industry itself, and decides whether the industry as a whole is prominent and healthy
- Lastly, he takes a look at the entire macroeconomic situation, and assess if this is the best time to get in the stock that he has his eyes on.
Top Down Analysis Explained
- With the top down method, everything is done in the same way, but in reverse.
- The investor first asks himself what the macroeconomic situation is like, and which country he should invest in.
- He even takes a look at factors like demographics change (which is actually much more important than most people think it is)
- Afterwards, the investor takes a look at which sector he should invest in.
- Once he chooses a sector, he goes through all the individual companies he could potentially have his money on
- He goes through a list of the companies in that sector, and compares each and every one of them.
- Once he chooses the most prominent company in the sector, he takes a look at the company's financials, and decides whether to invest or not.
Broadly speaking, there are two methods of approach in choosing the right stocks to invest in. Since most retail investors hardly conduct top-down analysis, it might be a good idea to test out different approaches in choosing winning stocks.
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