What Is a Downside?

A downside is a negative movement in the price of a security, sector or market. A downside can also refer to 澳洲幸运5官方开奖结果体彩网:economic conditions, describing potential periods when an economy has either stopped growing or is shrinking. When used colloquially, downsides can also refer to tradeoffs or negative consequences of an otherwise beওneficial decision.

In finance, downside risk is an important consideration when choosing an investment. Some investmen🎐ts have potentially infinit🦄e downsides, meaning that there is no limit to their potential losses.

Understanding Downside

Downsides are expressed in terms of an estimation of a security or economy's potential to experience negative movement. A 澳洲幸运5官方开奖结果体彩网:stock analyst, for example, may forecast how far a stock price might fall because of certain events. Meanwhile, 澳洲幸运5官方开奖结果体彩网:economists can predict the downside to a country's economy by taking into consideration factors such as the 澳洲幸运5官方开奖结果体彩网:unemployment rate, 澳洲幸运5官方开奖结果体彩网:inflation, and 澳洲幸运5官方开奖结果体彩网:gross domestic product (GDP) growth.

Examples of Downside

Let's say an investor paid $100,000 to own 1,000 shares in Company ABC. Though unlikely, the stock price could potentially fall to $0, meaning the 澳洲幸运5官方开奖结果体彩网:downside risk of the investment is 100% or $100,000. That’s where 澳洲幸运5官方开奖结果体彩网:calculating downside risk comes into play. In general, the higher the risk the greater the downside risk.

For most assets the downside is capped, as a price cannot go below $0. Exceptions include 澳洲幸运5官方开奖结果体彩网:short selling, a 澳洲幸运5官方开奖结果体彩网:trading strategy that enables investors to specౠulate on the decline of a stock or other securities price. If the price of an asset you shorted rises, you lose money. Moreover, your downside is theor༺etically infinite, as the price can keep on climbing.

Downside Protection Strategies

Investors can protect their portfolios against a downside by hedging🎀 their losses. This is known as downside protection. Downside protection provides a safety net if an investment starts to fall in val♉ue. This can be achieved in several ways, including:

Put Options

A 澳洲幸运5官方开奖结果体彩网:put option is a contract giving the owner the right, but not the obligation, to sell a specified amount of an 澳洲幸运5官方开奖结果体彩网:underlying security at a specified price within a certain time frame. If the price of the stock falls, the investor can either sell the stock at the price listed on the put or sell the put since it will have increased in value because it is 澳洲幸运5官方开奖结果体彩网:in the money.

Stop Loss Orders

When trading securities on an exchange, a 澳洲幸运5官方开奖结果体彩网:stop loss is an order placed with a broker to automatically sell a s♉ecurity when it falls at or below a certain price.

Diversification

A 澳洲幸运5官方开奖结果体彩网:diversified portfolio made up of assets that are 澳洲幸运5官方开奖结果体彩网:negatively correlated can ease downside risk.ꦍ When one rises, the other tends to fall, cushioning losses but also limiting potential gains.

Alternatively, investors might opt to wait out a market 澳洲幸运5官方开奖结果体彩网:correction,🌳 hoping that the stock ♌will bounce back in the future.

Money on the Sidelines

澳洲幸运5官方开奖结果体彩网:Money on the sidelines refers to cash that has not been invested or is kept in highly liquid assets like money market funds or certificates of deposit. Sidelines are used by investors hoping to "wait out" market downturns, by removing their money from the most volatile instruments and keeping it liquid enough that 𓃲they can easily reinvest in promising opportunities.

Downside vs. Downside Risk

A movement to the downside is often expressed in terms of risk, such as the downside risk to a particular country's economy, or the downside risk to a company’s stock because of changing consumer trends. A downside is the potential negative movement, while downside risk looks to quantify that potential move.

For the most part, the higher the downside potential the greater the upside potential. This goes back to the idea of the higher the risk, the higher the reward. An upside is a positive move in an asset price.

Downside risk can be evaluated with fundamental and technical factors, estimating the amount a security or asset price might fall in the worst-case scenario. This can be done using probabilities or 澳洲幸运5官方开奖结果体彩网:standard deviation models, although there is no way to perfectly estimate the downside unless some sort of 澳洲幸运5官方开奖结果体彩网:downside protection is in place.

Upside/Downside Ratio

In 澳洲幸运5官方开奖结果体彩网:technical analysis, the 澳洲幸运5官方开奖结果体彩网:upside/downside ratio is used to determine whether a market is 澳洲幸运5官方开奖结果体彩网:overbought or oversold. It is calculated by dividing the number of advancing issues (the number of securities that closed above their opening price) by the number of declining issues (the securities that closed below their opening price). This is another variation of the 澳洲幸运5官方开奖结果体彩网:advance/decline ratio.

If the upside/downside ratio is lower than one, the market for that security is likely to be oversold, meaning that there are very few sellers left t🍎o sell at the current price. In this case, the price might be expected to begin rising. The reverse is true if the ratio is higher than one, indicating overbought conditions.