What is an Upside Reward?
How Does an Upside Reward Work?
For example, let's assume you purchase 100 shares of Company XYZ at $5 per share, for a total investment of $500. If you think that Company XYZ shares will rise to $15 per share at some point, your upside reward amounts to $10 ($15-$5) per share, or $1,000 total.
The reverse is true for people who short stocks: their upside reward comes when the stock price falls.
Why Does an Upside Reward Matter?
Upside reward is the fundamental motive for making any investment. The size of the upside reward of course varies with the investment--and with the risk associated with that investment. Higher-risk investments generally have more upside reward; low-risk investments generally have less upside reward and are thus primarily concerned with preserving the value of the original investment. Ultimately, expected upside reward is based on estimates and educated guesses.