In investing terms, market exposure has to do with the amount or percentage of the investment portfolio that is associated with a given type of investment or investments that are concentrated on a specific industry. As the percentage of the total worth of the portfolio invested in a given industry increases, so does the amount of market exposure that the investor has within that market. Understanding the degree of exposure associated with various investments is an essential tool to creating a balanced portfolio where the value of the portfolio is less subject to downturns in the marketplace.
The easiest way to understand market exposure is to look at how it is calculated. For example, if an investment portfolio is worth $100,000 in US dollars (USD), and half of that worth is in the form of stocks issued by prominent department stores, then the investor has a market exposure of 50% in the retail industry. Assuming that a quarter of the total worth of the portfolio is invested in stocks issued by building supply manufacturers, the portfolio carries a 25% market exposure in the construction industry.
Should some series of circumstances adversely affect the profits of retail companies in general, the high market exposure of the investor within that industry would cause the overall value of the portfolio to decline significantly. While the losses may be mitigated by a corresponding upswing in the construction industry, the high concentration of investments in one industry sector could still lead to financial hardship for the investor. It is for this reason that may financial analysts recommend limiting an investor’s market exposure to any given industry to a relatively small percentage. This makes it possible to more easily offset losses in one industry with increases in others and thus maintain the overall worth of the portfolio.
In order to manage market exposure effectively, investors must pay close attention to how they conduct asset allocation. By making sure to diversify the investments found within the portfolio, not only by issuer but also by industry type, the risk of loss is decreased, while the potential for increasing the value of the portfolio remains high. In order to maintain a balance of this type, it is important that the investor constantly be aware of developing trends within the industries represented in the portfolio, including projections of where those markets will move in the next six months to a year. At the same time, attention to the financial outlook for the companies that issue the shares that make up the portfolio is also important. This is because an individual company may undergo severe financial reverses that affect the value of its stock, even when the industry as a whole is doing very well.