What Is Upside?
Upside refers to the potential increase in the value of an investment, portfolio, company, sector, market, or economy. Upside is measured in monetary value or percentage terms. Analysts commonly use either technical analysis or fundamental analysis techniques to predict the future price and upside of an investment, particularly when it comes to stock prices. A higher upside means that the stock has more value than is currently reflected in the stock price. Upside is the opposite of downside, which is the negative movement of an investment's price.
Key Takeaways
- The upside is the potential for an investment to increase in value, as measured in terms of money or percentage.
- Upside is the opposite of downside, which determines the downward movement of a financial instrument's price.
- Analysts use fundamental or technical analysis to make predictions about movement.
- The upside is essentially the draw for an investor to invest, and the upside potential is tied to how much risk the investor is willing to assume.
Understanding Upside
Upside refers to the predicted appreciation in the value of an investment, financial portfolio company, sector, market, or economy. It is the opposite of downside. Put simply, upside is a projected price increase. The concept of upside is the motivating factor for an individual to invest. The magnitude of the upside move primarily depends on the risk associated with that investment.
The market axiom of high risk/high reward holds when it comes to deciding whether to commit to or pass on an investment. Investors with a high tolerance for risk typically choose investments with huge upside, while those who are risk-averse will opt for investments that have limited upside but will be more apt to preserve their initial investment value.
Factors that can affect the upside potential for an investment or portfolio include (but aren't limited to):
- Market swings and trends
- Economic indicators
- Company- and industry-specific news and events
- Business dynamics
The high risk/high reward concept corresponds with the idea of upside: the higher the risk, the more the upside of an investment.
Upside and Trading Strategies
Fundamental Analysis
Fundamental analysis evaluates the upside price of a stock by considering the ability of the investment firm to generate sales and earnings and to make effective decisions about company assets.Companies that manage their costs well and increase their profit margins have a higher upside.
Businesses can increase sales by moving into new markets or by adding a product line.Money managers who use fundamental analysis also consider how effectively a business uses assets to generate sales and profits.
Technical Analysis
Technical analysis is a method that considers the historic patterns in the price of a stock and in the trading volume of a security. Technical analystsbelieve that price movements are trends, and these managers use charts to determine the upside in a stock’s price.
For example, a breakout occurs when a stock price trades above a recent price trend. If a stock has been trading between $20 and $25 per share, for example, a price move to $28 is a breakout, which is an indication that the stock price has an upside above $28.
Importance of Upside
Upside not only refers to an investment’s potential gains in value but is also a concept used to judge the success of a portfolio manager'sperformance when compared to a benchmark. For many mutual funds, the investment objectiveis to outperforma specific benchmark, such as the .The upside capture ratio indicates how much upside the mutual fund captures when compared to the benchmark.
Upside also plays a partin short selling, which is the sale of stock that an investor does not own. In short selling, the seller must deliver borrowed securities to the buyer by the settlement date. Eventually, the short seller must buy the shares to cover the short position,and the seller’s goal is to buy back shares at a lower price. Short-sellers look for stocks that have reached their upside potential, which meansthe stock's potential to decline increases.
What Is the Upside/Downside Ratio?
The upside/downside ratio is a metric used by technical analysts to determine the direction change of financial assets. More specifically, it calculates the upward versus downward volume. This ratio is calculated by dividing advancing issues (volume traded that close above their opening price) by declining issues (volume traded that close below their opening price).
Analysts and investors use this ratio to understand the momentum of a financial instrument, company, market, sector, or economy at any given time. This helps identify entry and exit points to maximize gains and minimize losses.
What Does Downside Mean?
Downside is the opposite of upside. It refers to the drop or negative movement in the price of a financial asset, such as a stock. It can also refer to the downward movement of a financial portfolio, company, sector, or market. Like upside, downside is expressed in a dollar value or percentage terms.
What Upside Risk?
Upside risk refers to the uncertain upward potential for a financial instrument, market, sector, or economy. Upside risk is positive, which means it can work to an investor or company's favor. It is the opposite of downside risk, which allows observers to determine how much they may lose.
The Bottom Line
Upside is a concept that refers to the potential rise in value. It can be used to measure the possibility of increase in the value of an asset, your portfolio, a company or sector, or the economy. As an investor, it is a useful tool that can help you determine the price of stocks and construct a financial portfolio. Of course, it's always important to do your due diligence and ensure that you do regular checkups to ensure that you aren't losing money in the future.
FAQs
Upside risk refers to the uncertain upward potential for a financial instrument, market, sector, or economy. Upside risk is positive, which means it can work to an investor or company's favor. It is the opposite of downside risk, which allows observers to determine how much they may lose.
What is a good example of an upside risk? ›
Typical response strategies include the allocation of additional resources or the de-prioritization of other tasks. Conversely, an "upside risk" might be that the task takes less time than planned. Response strategies could include using the newly freed-up resources to work on tasks previously pushed into phase 2.
What is an example of a risk reward? ›
Remember, to calculate risk/reward, you divide your net profit (the reward) by the price of your maximum risk. Using the XYZ example above, if your stock went up to $29 per share, you would make $4 for each of your 20 shares for a total of $80. You paid $500 for it, so you would divide 80 by 500 which gives you 0.16.
What is the upside risk? ›
In investing, upside risk is the uncertain possibility of gain. It is measured by upside beta. An alternative measure of upside risk is the upper semi-deviation. Upside risk is calculated using data only from days when the benchmark (for example S&P 500 Index) has gone up.
What is upside and downside? ›
Upside and downside. An "upside" is an advantage, while a "downside" is a disadvantage.
What is the risk reward upside? ›
The concept of upside is the motivating factor for an individual to invest. The magnitude of the upside move primarily depends on the risk associated with that investment. The market axiom of high risk/high reward holds when it comes to deciding whether to commit to or pass on an investment.
What is a good example of an upside risk shrm? ›
A team finishes its project two weeks ahead of the schedule. An upside risk is an opportunity that arises out of uncertainty about outcomes. Completion date is uncertain, but early project completion is an opportunity: an uncertainty that has a positive outcome.
What is the best risk reward strategy? ›
In many cases, market strategists find the ideal risk/reward ratio for their investments to be approximately 1:3, or three units of expected return for every one unit of additional risk. Investors can manage risk/reward more directly through the use of stop-loss orders and derivatives such as put options.
What is an example of a high-risk low reward situation? ›
From a social perspective, a high-risk low-reward is Cheating. The risk of cheating when you are 'happily' married with family/kids is very high because the repurcussion and ultimate consequences is destruction of your family and possibly your career or life, depending on the individual situation.
What is a good example of the relationship between risk and expected reward? ›
For example, a portfolio composed of all equities presents both higher risk and higher potential returns. Within an all-equity portfolio, risk and reward can be increased by concentrating investments in specific sectors or by taking on single positions that represent a large percentage of holdings.
In upside-risk models, providers are rewarded for spending below a given threshold but not penalized if they exceed the limit, putting the risk entirely on payers. Downside-risk models are those in which the risk is either shared between payers and providers or assumed entirely by providers.
What is upside risk in pricing? ›
Upside risk measures the extent to which the value of a stock or other investment might go up beyond expected levels. It's when you stand to get an outcome better than the benchmark against which it's being measured, such as the FTSE 100 index.
Does upside mean profit? ›
Definition. Upside refers to the potential for a venture capital investment to generate significant returns or profits. It represents the positive outcome or the favorable result that investors anticipate when investing in a particular venture.
Is upside risk a good thing? ›
An opportunity (sometimes called an "upside risk") is "an uncertainty that could have a positive effect" and is the opposite of a threat. You must consider both to manage risk effectively in your project or organization. Doing so allows you to take advantage of beneficial outcomes as well as avoid unfavorable ones.
What is the upside downside scenario? ›
Upside scenario (a.k.a. “best case scenario”): What happens to your business if things go better than planned. Downside scenario (a.k.a. “worst case scenario”): What happens to your business if things go worse than planned.
What is an example of a downside risk? ›
The purchase of a stock, for example, has a finite amount of downside risk bounded by zero. The investor can lose their entire investment, but not more. Unlimited downside risk can exist with a short position in stock through a short sale since the price of the security could continue rising indefinitely.
What is an example of on the upside? ›
How to Use on the upside in a Sentence
- In fact March has closed on the upside 67.9% of the time. ...
- The Bears are betting on the upside of some of these signings. ...
- But on the upside, even a small fish fry with your family can be more of an event than just a meal.
Examples of positive risks
A potential upcoming change in policy that could benefit your project. Technology currently being developed that will save you time if released. A grant that you've applied for and are waiting to discover if you've been approved.
What is an example of upside down? ›
The painting was hung upside down. Salter held the bag by the corners and shook it upside down. His eyes were open and everything he saw was upside down. Tony had an upside-down map of Britain on his wall.
What is an example of the world upside down? ›
You could say that meeting someone you would eventually marry turns your world upside down, because your life will now include that person, which is a drastic change.
