Recently, we tackled about one of the 2 market analysis techniques, which is the top-down approach. The said approach is more commonly used by beginner investors who have not yet familiarized themselves on certain companies that have the potential to be profitable. How about the investors who already have some trading experience and knowledge about the market? In this article, we would talk about the other approach, which is the bottom-up market analysis.
What is bottom-up market analysis?
Bottom-up market analysis is the opposite of the top-down approach. If the latter focuses on macroeconomic factors, the bottom-up approach is more on the microeconomic aspects. It focuses on analyzing individual stocks and companies, regardless of the current state of the economy.
This approach is called a bottom-up market analysis simply because it starts at the bottom – the stock or company. It is more commonly used by investors who have some knowledge about the prospect company. Some great candidates for this approach are blue-chip companies, market dominant companies, and international corporations. The key is to find a company that offers products and services which are continuously patronized by consumers and making consistent profits.
The factors assessed include the company’s financial statements, products and services, supply and demand, management, marketing, and its overall performance. After analyzing the finer details of the company, the approach works its way up towards the industry and into the economy, although it may or may not affect the decision of the investor even if the company is set in a declining economy. This is because through the bottom-up approach, analysts recognize companies that have the capacity to perform well even in a falling economic state.
Example of a bottom-up approach
Let us say that an investor wants to invest his money on the stock market. He is an avid consumer of Company ABC, which is known for producing great cell phones. He knows that a lot of people swear by the company’s products so he starts to apply the bottom-up approach to assess the company’s profitability. He learns from charts, financial statements, and official news from the company that they are planning some innovations that he thinks can open an opportunity for more income. Satisfied with the results, he looks on the technology industry and found that Company ABC is one of the leading companies. Although the country it is situated is currently under economic pressure, he is still convinced that Company ABC will continue to flourish despite that. After some time, he finally decides to invest his money in that company because of the favorable results he got from the bottom-up market analysis.
Importance of bottom-up market analysis
Bottom-up market analysis is very important, especially for long-term investors because it can recognize companies that can outperform the market even when going through periods of economic decline. Although it is not possible to predict this accurately, bottom-up market analysis helps in finding companies that usually recovers well after falling low in the market. This also provides a great opportunity for investors to enter the market while it is still low and be able to ride a rising trend while maximizing the profits along the way.
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