Downside Risk

Downside risk means the possible amount an asset or stock could fall from its current price. In simple terms, downside risk shows how much investors could lose if things go wrong. Downside risk is important because investors need to consider potential losses, not only possible gains. A stock with high upside potential may still be unattractive if downside risk is also very high. For example, if a company misses earnings and cuts guidance, investors may believe the stock has significant downside risk. Downside risk is not the same as a certain loss. It is a possibility, not a guarantee.