The Approaches To Investing.

The Approaches To Investing.

Value investing is like an art. Though, there are no such rigid rules for investing, yet, there are some framework which you need to follow for selecting the right stocks.

The two approaches to investing

There are more than 5000 listed companies in the market right now, how would you pick the best stock among them? Of course, you cannot analyze all the listed companies, that's impossible. So, how would you list down the best stocks to analyze? Here are two ways.

Top-Down approach

Here is the top-down approach we first select a particular sector and then we are selecting a particular stock in that sector.

Parameters to use while selecting the particular sector.

• The sector should be in our favour. Check if that sector faced any problem in the past.

For example: The pharma sector is facing a huge problem in the US due to US FDA issues. so, this sector has a negative sentiment among the investors, but you can find good companies at a cheap price.

• There should be enough future growth in the sector in which you are going to invest.  

For example: E-commerce and driverless cars will surely grow in future. So there is a huge scope in these industries. 

• Look at technological improvements. Sometimes a new invention can benefit the whole sector.

For example: Increase the use of solar panels made solar companies more powerful.

Bottom-up approach

• The bottom-up approach is exactly the opposite of the top-down approach, Here you are open to buy any stock from any sector which meets your valuation criteria.

• In this approach, you can select stocks through Knowing the companies, Look for companies whose products you like or use on a daily basis like Toothpaste of Colgate, Slippers of Bata, shaver of Gillette, etc. Choosing stocks based on products helps to identify good companies because you know if the product is liked by the consumer or not.

• You can select stocks of Companies related to your job or profession. Like if you are a doctor then you should select stocks of pharma companies if you are an electrical engineer you can select stocks of power companies and so on. Opting for such stocks would be beneficial for you because you will have much knowledge of such companies related to your field.

• News in magazines, newspaper and other sources also plays a vital role in stock picking. If you find that a certain product has got media attention or you are noticing that many people are using a certain item it's worth researching about those stocks.

So, which of the two approaches are correct?

The best part of stock investing is that you have the freedom to decide how to invest as per your choice, these approaches will just help you shortlist the stocks and the research process becomes easier.

~By Suddha