What is Upside?

Upside refers to the potential increase in value, measured in monetary or percentage terms, of an investment. Analysts commonly use either technical analysis or fundamental analysis techniques to predict the future price of an investment, particularly stock prices. A higher upside means that the stock has more value than is currently reflected in the stock price.

Understanding Upside

Upside refers to the predicted appreciation in the value of an investment and is the opposite of downside. Arguably, the concept of upside is the motivating factor for an individual to invest. The magnitude of the upside move will depend primarily on the risk associated with that investment. The market axiom of high risk/high reward holds true when it comes to deciding whether to commit to, or pass on, an investment. Typically, investors with a high tolerance for risk will choose investments with huge upside, while those that are risk averse will opt for investments that have limited upside but will be more apt to preserve their initial investment value.

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.聽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.聽Money Managers that use fundamental analysis also consider how effectively a business uses assets to generate sales and profits.

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 analysts聽believe that price movements are trends, and these managers use charts to determine the upside in a stock鈥檚 price. A breakout, for example, 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.

Key Takeaways

  • Upside refers to the potential increase in value, measured in monetary or percentage terms, of an investment.
  • Analysts commonly use either technical analysis or fundamental analysis techniques to predict the future price of an investment, particularly stock prices.
  • The magnitude of the upside move will depend primarily on the risk associated with that investment.

Why Upside Matters

Upside not only refers to an investment鈥檚 potential gains in value, but is also a concept used to judge the success of a portfolio manager's聽performance when compared to a benchmark. For many mutual funds, the investment objective聽is to outperform聽a specific benchmark, such as the Standard & Poor's 500 index.聽The upside capture ratio indicates how much upside the mutual fund captures when compared to the benchmark.

Upside also plays a part聽in short selling. Short selling refers to the sale of stock that an investor does not own. In short selling, the seller must deliver borrowed securities to the buyer by a settlement date. Eventually, the short seller must buy the shares to cover the short position,聽and the seller鈥檚 goal is to buy back shares at a lower price. Short sellers look for stocks that have reached their upside potential, which means聽the stock's potential to decline increases.