Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Downside

What it is:

Downside refers to an investment's potential loss in value.

How it works (Example):

Let's pretend you purchase 100 shares of Company XYZ at $5 per share, for a total investment of $500. If the shares subsequently fall to $1 per share, your downside equals ($5-$1 = $4) per share, or $400.

The reverse is true for people who short stocks: For them, upside comes when the stock price falls.

Why it Matters:

Downside is the fundamental motive for avoiding any investment. The size of the downside, of course, varies with the investment -- and with the risk associated with that investment. Higher-risk investments generally have more downside (but they have more upside, too); low-risk investments generally have less downside and are thus primarily concerned with preserving the value of the original investment.

Ultimately, expected upside and downside are based on estimates and educated guesses. No analyst or investor can predict the future, thus making upside and downside inherently unpredictable.