InvestorQ : What is a Top-Down Approach in investment?
Ishita Jain made post

What is a Top-Down Approach in investment?

Answer
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Mahima Roy answered.
1 year ago


Investing through a top-down approach refers to start investment from a bird’s eye view, that is, starting from the macro factors moving down to micro, while choosing an investment. According to this approach, a bigger picture of the economy like political factors, trade balances, currency movements, inflation, interest rates, etc are taken into consideration while selecting a country for investment. Once a stable and investment-friendly country is selected, the next step is to find the industry or sector that has a high probability to grow in the next few years. This includes finding for new trends, new demographic, new innovative products, etc. Here, a comparison of every industry is done to each other so that the market conditions of each industry could be understood. Then comes the last step, that is, finding the company in which to invest. At this stage, all the companies selected from the industry is compared to each other. Profit ratio, debt ratio, price-to-earnings, price-to-sales, dividend yields, and other fundamental facts are checked. This step also includes in finding the phase of life-cycle every company is at. If a company is at an initial step and is at their inception phase, then the risk might be high but if managed well the scope to grow is wide, as the company has a long way to complete its full life-cycle. But a company with good fundamentals is also not advisable if it is at its stagnant stage because investing in such companies might be riskier as the Company has already achieved its high level and scope to grow from there is quite less.
So, if we divide the whole process of a top-down approach, we can come to the following steps:-
  • Global Economy
  • Local Macro-economic factors
  • Sector and Industry analysis
  • Company analysis