Stock analysis for investment decision making
Although technical analysis is used by many investors, fundamental analysis is far more prevalent. By performing fundamental analysis investor forecasts among other things, the future changes in GDP, changes sales, other performance indicators for a number of industries and, in particular, future sales, earnings for a number of the firms. The main objective of this analysis for the investor is to identify the attractive potential investments in stocks.
Fundamental Analysis – Approach
Analysts and investors use two alternative approaches for fundamental analysis:
• “Top-down” forecasting approach;
• “Bottom-up” forecasting approach.
Using “top-down” forecasting approach the investors are first involved in making the analysis and forecast of the economy, then for industries, and finally for companies. The industry forecasts are based on the forecasts for the economy and a company’s forecasts are based on the forecasts for both its industry and the economy.
Using “bottom-up”forecasting approach, the investors start with the analysis and forecast for companies, then made analysis and forecasts for industries and for the economy.
In practice “top down” approach prevail in analysis and forecasting because logically for forecasting of the companies performance the changes in macroeconomic environment must be analyzed first otherwise the inconsistent assumptions could be drawn. The combination of two approaches is used by analysts too.
For example, analysis and forecasts are made for the economy using “top-down” approach and then
using “bottom-up” approach continuing with the forecasts for individual companies. But despite of the different approaches to the sequence of the analysis the content of it is based on the E-I-C analysis.