Market Exposure - Explained
What is Market Exposure?
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Table of ContentsWhat is Market Exposure?How Does Market Exposure Work?Example of How Market Exposure WorksWhy an Investors Need to Diversify Portfolio ExposureCategories of Marketing ExposureMarket Exposure by TypeMarket exposure by investment Market Exposure by Region Market Exposure by Industry
What is Market Exposure?
Market exposure refers to the percentage of a portfolio, invested in a given type of stock, industry or market sector. It can also be defined as the amount of money which has been invested in specific security type or in an industry, expressed in percentage of the entire portfolio holdings. Another name for market exposure is exposure.
How Does Market Exposure Work?
Generally, market exposure is used to describe the funds portion that has been invested in a given asset or sector. Basically, a portfolio of an investor comprises of various classes of assets such as shares, commodities, and forex. This means that is possible for a single position to have exposure to a number of markets. For instance, lets assume that an investor has shares in a company that produces coffee. In this case, the investor will have exposure to the stock market, to the commodity market, and also to the potential forex market in case the company is international.
Example of How Market Exposure Works
Note that market exposure is expressed as a percentage. Lets assume you have a portfolio valued at $10,000. You then invest $4,000 in gold. This means that you will have a 40% market exposure to gold. Also if you have $1,400 invested in real estate, then your market exposure will be 14%, and so on.
Why an Investors Need to Diversify Portfolio Exposure
If as an investor you want to ensure great returns with minimal loss, then you need to determine the exposure of your portfolio asset allocation to given markets or securities. For example, to ensure less risk, you can have your portfolio with market exposure to both bond holdings and stock. This process is referred to as diversification. Diversification ensures that you do not invest money in one asset but rather in a variety of asset classes to spread the risk. The whole point here is that if one asset does not perform well in the market, then as an investor, you can rely on the other asset investment for returns.
Categories of Marketing Exposure
Market exposure is categorized into three as explained below:
Generally, market exposure risks equal the amount an investor has invested in a particular market. In other words, the amount of money an investor has invested is the same as that which he or she risks losing should the market performance decline. For instance, if an investors portion of portfolio amounting to 30% is invested in a given asset, then the market exposure for this particular investment will also be 30%. Since exposure results will always vary between profits and losses, it means that the market performance is unpredictable. For this reason, it is advisable for investors to diversify their portfolios so that they can minimize the risk factor related to market exposure in the already unpredictable market.
Market Exposure by Type
There are different ways of dealing with market exposure when investing in the markets. They are as described below:
Market exposure by investment
To be able to examine investment, you will have to base your examination on the type of investment. For instance, an investor may decide to invest 15% in bonds and 70% in stocks. In this case, this investors market exposure to stock will be 75%. Whether the investor losses or gains in this investment will highly depend on the performance of the stocks in the market, rather than the bonds performance.
Market Exposure by Region
An investor can examine market exposure of his portfolio based on the investment he or she holds in a given location. This can be done by having domestic investment and foreign investment separately. The investor can further ensure that the investment he holds in the foreign markets is divided based on their specific region. For example, lets assume that an investor owns a portfolio that has both domestic and foreign investment each valued at 50%. If this investor desires to do a further separation, then he can further divide his investment in the foreign market whereby 30% will be in European markets while 20% in Asian markets.
Market Exposure by Industry
Lets assume that market exposure in various sectors is as follows: 80% to stocks, 30% to health care, 25% to technology, 20% to financial related services, 15% to defense, and 10% to the energy. If you, for example, compare the market exposure of healthcare and energy, it is clear that the portfolios returns will be influenced by the stock in the healthcare rather than in the energy. This is because the healthcare sector has greater market exposure compared to that of the energy sector.