Exposure

DEFINITION of exposure

Exposure or Market exposure is a financial term which measures the proportion of money invested in the same industry sector.

WHAT IT IS IN ESSENCE

It is the degree to which a portfolio invests in a particular stock or market sector.

An investment portfolio consists of several types of assets (for example, stocks, bonds, real estate, commodities, etc.). Consistent with the financial goals of the account holder. It is the portion of the portfolio’s risk attributable to its unique composition of securities. For example, a portfolio with shares of some stock is exposed not only to fluctuations in the company’s stock price. But it is to the overall success level of the whole industry.

This particular proportion is expressing as a percentage. If a portfolio has 40% real estate assets, that portfolio has 40% real estate market exposure.

To be more clear, a stock portfolio with a total worth of $500,000, with $100,000 in semiconductor industry stocks, would have a 20% exposure in “chip” stocks.

In trading, it is a term that means three things:

 

  • The total market value of your trades at open
  • The total amount of possible risk at any given point
  • The portion of a fund invested in a particular market or asset

In stockbroking, your exposure is equal to the total amount you spent on opening positions.

Leveraged trading works differently. Your exposure can expand considerably beyond your initial outlay, known as your margin. Some trades, for example, require a 10% margin and exposes 90% beyond the amount of their deposit. In these cases, profit can be bigger but losses can exceed initial deposits.

HOW TO USE

Let’s say, the large percentage of a portfolio is on one particular asset class. In that case, the portfolio’s value will be commensurately affected by the gains and losses in that asset class.

For this reason, investors must take care when deciding the amount of market exposure they wish to assume. Many experts encourage investors to diversification across a broad range of asset classes so that their portfolios’ aren’t overly exposed to one particular sector.