The top-down valuation process begins by examining the influences of the general economy on all firms and the security markets. The next step is to analyze the various industries in light of the economic environment. The final step is to select and analyze the individual firms within the superior industries and the common stocks of these firms. The top-down approach thus assumes that the first two steps (economy-market and industry) have a significat influence on the individual firm and its stock (the third step). In contrast, the bottom-up approach assumes that it is possible to select investments (i.e. firms) without considering the aggregate market and industry influences.
Definition