What is Market Exposure?
Market exposure is the degree to which a portfolio invests in a particular stock or market sector.
How Does Market Exposure Work?
An investment portfolio is made up of several types of assets (for example, stocks, bonds, real estate, commodities, etc.) consistent with the financial goals of the account holder. Market exposure is the portion of the portfolio's risk attributable to its unique composition of securities. For example, a portfolio with shares of a pharmaceutical stock is exposed not only to fluctuations in that company's stock price, but it is exposed to the overall success level of the pharmaceutical industry.
Market exposure is expressed as a percentage. If a portfolio is made up of 40% real estate assets, that portfolio is said to have 40% real estate market exposure.
Why Does Market Exposure Matter?
If a large percentage of a portfolio is dedicated to one particular asset class, 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 be diversified across a broad range of asset classes so that their portfolios' aren't overly exposed to one particular sector.