Many times you hear stock market analysts and mutual fund managers use  the terms bottom up and top down to describe approaches to investing. Most expert stock market fund managers use one of these methods of stock selection. The two approaches involve opposing philosophies in determining which companies in which to invest.

Bottom up

A bottom up approach involves searching for outstanding performance of individual companies before considering the impact of economic trends in that company’s industry. You may identify the companies from research reports, stock screens, news accounts or personal knowledge of the products and services offered. The bottom-up approach assumes that individual companies have the potential to do well even if their industry or the overall market is not performing at its peak.

Top down

The opposite of the bottom-up approach is called top down. The top-down style is one in which an investor first looks at trends in the general economy, then selects industries and, finally, companies that may benefit from those trends. For example, if you think inflation and interest rates will stay low, you might be attracted to the retailing industry or interest rate senstive areas like real estate or autos, because consumer spending power is often enhanced by low inflation and low interest rates. A top-down investor then might look at real estate, autos and major retailers to see which company has the best earnings prospects in the near term.