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.

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
  

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 analysts believe 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's performance when compared to a benchmark. For many mutual funds, the investment objective is to outperform a specific benchmark, such as the Standard & Poor's 500 indexes. The upside capture ratio indicates how much upside the mutual fund captures when compared to the benchmark.

Upside also plays a part in 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 means the stock's potential to decline increases.

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.