Different Approaches to Investing - Essay Example

Now as an inventor, one gets confused that where should he invest his money. The investor would be looking for stocks that provide the best profit. In the case of stock trading, the investor would be looking for industries or companies that are performing well and their financials are also good. However, the performance level is crucial in determining the stock price, but it is not necessary that a company that has a good financial statement may be the best to invest. This is because the movement of the value of the stock price changes the activities of the investors, so the investor needs to clearly watch the demand and supply of the stock and invest accordingly. That is why, people say that trading requires the full attention of the mind and is not a luck game. To be a successful investor, one should have the quality of asset management.   Selecting the Assets: Now, picking a sole asset or playing only with one stock is never a feasible option. Such types of assets are called stand-alone assets and risks associated with them the stand-alone risk (Brigham 1994 p.156). There are always chances that your value of the stock may go down and you would likely have a loss or you may even win. But the probability of success is always uncertain. So most investors or traders advise going for more than two assets and investing in different sectors or companies. So one should make a portfolio of assets so that the value of one stock goes down, the value of others would be might go up and in the end, you may not lose your money. Therefore, logically investing in securities as a portfolio is more beneficial than going for stand-alone securities (Brigham 1994 p.156). The one who goes for stand-alone are risk lover and the one who opts for the portfolio is risk averse. Once you have created a portfolio, you would have to manage your assets efficiently by watching the behavior of the prices. If the market gets fluctuated, you should dispose of your assets and look for assets giving a premium above par value.    Fundamental Analysis: Now when an investor would be looking for a company or an industry to invest in, he needs to analyze its financial statements such as Income statements, Cash Flow Statements, etc, and also its competitors, so that he could among them and then decide. Analyzing past trends and patterns of movement of assets should also be done. All such basic analyses when selecting security are called Analytical modeling. There are basic types of modeling, Technical, and Fundamental. The Technical approach is much more simple because it mainly deals with the past trend and by looking at it, calculated the expected future value of the asset. Whereas, the Fundamental approach is more studied and requires a more in-depth analysis of assets. The fundamental analysis requires more quantitative analysis involved. The investor must know financial statements and ratios such as Earning Per Share (EPS), Sales Per Share (SPS), Return on total Asset (ROA), Return On Investment (ROI), and other liquidity ratios, turnovers, etc (BuckInvestor.com). Approaches  Now once you get complete knowledge of the price movement of the knowledge, the question of how to invest arises i.e. should the investor invest sector-wise or company-wise? In the Top-down approach, the investor first looks at the entire stock market, how the specific industry is performing, and then finally at the stock (buckinvestor.com). For Instance, I have invested in Shell Petroleum. Now following the top-down approach I would first analyze the entire stock exchange and look at whether the market index points are performing. Are they closing at a higher rate or not? Then my next step would be to look at the performance of the Refinery industries, then analyze how Oil companies are doing i.e. looking into the competitors of Shell. And then I would analyze how has Shell performing, whether its stocks are going high or low etc. Thus, the top-down approach follows macro level approach (Viney 2007)   Bottom-Up Approach: The Bottom-up approach is opposite to the top-down approach. In the bottom-up approach, I would have first analyzed Shell’s performance, then its competitors, after that the Refinery industry, and in the end, the entire stock market. The bottom-up follows a micro-level approach. Pros and Cons of the Bottom-Up Approach: The bottom-up approach is good for financial organizations such as the Banking industry as their risks can be quantified. This approach helps where Value at Risk (VaR) concept is used and VaR is a good option for maintaining a portfolio (Stein 2002 p.3). The performance of the assets can be analyzed more frequently i.e. daily or weekly basis, whereas that of the market of industry period for analysis is generally months or quarters. 

At times the entire market is performing poorly, in that case, there is no need for knowing the value of a specific stock because there are chances that its value might also fall. This approach is not useful where analysis is based on Cash-Flow at Risk (C-FaR) as it cannot estimate cash flow movement (Stein 2002 p.3). Read More