In investing, the term top down denotes an approach to investing in which overall market cycles and trends are used to guide investments, rather than the performance of individual stocks.
Top down investors invest in industries or entire markets based on predictions of future economic developments based on historical data, political developments, technological developments and many other macro-economic factors. Buying shares of index funds such as exchange traded funds (ETFs) which track a key stock index or a market index is one example of top-down investing.
While investing in individual companies based on their fundamentals (bottom-up investing) requires the thorough analysis of each company’s revenues, financial management, research and development, management, key employees, market share, growth potential and brand awareness, top down investments are normally based on expected growth or decline in entire sectors.
See also: Chart analysis