Online Investing on the Australian Sharemarket, 5th Edition

Chapter 10Using online indices to improve profitability

In this chapter I describe the various indices you can access online, how to use them and, most importantly, how you can use this knowledge to improve your share investing profitability.

Bottom-up and top-down approaches

So far I've discussed analysing shares by two main methods: fundamental analysis and technical analysis (charting). These are known as ‘bottom-up' approaches because you start by investigating the ‘grass roots' of a business and the performance of its shares. You can then decide whether the shares are worth buying or whether, if you're holding them, you should consider selling.

An alternative is known as the top-down approach, where you start by looking at the factors affecting an economy as a whole and then work down through sectors in the economy and finally companies within the sector. In order to apply a top-down approach you need to use indices, as these allow you to form an impression of the performance and prospects of businesses in similar sectors of the economy.

To give you a better idea of the top-down approach and the value of indices, let's look at investment property. Suppose you wanted to buy an Australian investment property to make capital gains in a rising property market. One approach you could use would be to search properties for sale, find one that looked promising, then investigate this property further to decide whether or not to purchase. This would be a bottom-up approach.