What is exposure?
Exposure is a general term that can refer to the total market value of a position, the total amount of possible risk at any given point, or the portion of a fund invested in a particular market or asset.
There are two types of exposure: financial exposure and market exposure.
Financial exposure explained
Financial exposure is the amount of capital that you stand to lose when you invest in an asset, otherwise known as risk. When investing, financial exposure is limited to the amount that you spend on opening a position – for example, if you invest in shares which become completely worthless, you would only lose the amount you paid. But, if you trade with leverage, your exposure increases because your capital is amplified beyond the initial outlay, known as your margin (deposit). In these cases, your profit and losses can be magnified.
Market exposure explained
Market exposure describes the portion of a fund or portfolio that is invested in a particular sector or asset. Normally, an investor or trader’s portfolio will be made up of different asset classes, like commodities, shares and forex. It is possible for one position to be exposed to multiple markets.
For example, if you have shares in a coffee-producing company, you would not only be exposed to the stock market, but also the commodity market and potentially the forex market too if the company was international.
