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Intermediate Level

There are two main approaches to fundamental analysis:

Bottom-up (or micro) or top-down (or macro) Bottom Up

This involves researching factors specific to a particular market and seeing how these measure up against others.

For instance, in evaluating different companies a “bottom-up” investor will want to look at the company’s management teams, profit and loss account, balance sheet and valuation metrics such as the price/earnings ratios.

For currencies, an investor may focus on interest rate differentials, the GDP and inflation projections for a particular country relative to another

Top down

This approach considers the economic environment and how that may affect a particular company’s share price or a country’s currency

For example, if the economic cycle is such that global growth is slowing and that interest rates are set to fall, then investors would look to buy solid dividend paying stocks in the utilities and consumer staples sectors, while avoiding those in, say, consumer discretionary and advertising.

It may be that growth is accelerating in the Asian Pacific region relative to Europe. In this case investors would look to buy the currencies of the countries in the former while reducing their exposure to the latter.

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