Top-Down Vs Bottom-Up Approach Of Investing - Finance With Chinmay

Many new investors entering into stock markets have a common question – What approach should I have? Should I start with a ‘big picture’ i.e. economy, GDP growth rates, interest rates, currency rate, commodity prices, inflation etc which can affect broader stock markets which eventually will affect the price of an individual stock or should I start directly with a company without much concerns about the overall economy?
The first approach of investing is called as “Top Down Approach” while the latter is “Bottom Up Approach”.
Top Down Approach – Top down approach starts with analysing macro level events like global economy, GDP rates, currency and commodity prices like gold & crude oil, interest rates, inflation. After analysing these macro factors different sectors and industries are selected which are most likely to be benefited due to current and forecasted future macro-economic conditions. After shortlisting the sectors and industries, stocks are shortlisted which can be most benefited in current and forecasted future scenario.