Downside

Written By:
Paul Tracy
Updated October 18, 2020

What is a Downside?

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

How Does a Downside Work?

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 Does a Downside Matter?

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.