what is financial exposure 
financial exposure is the amount an investor stands to lose in an investment should the investment fail for example the financial exposure involved in purchasing a car would be the initial investment amount minus the insured portion knowing and understanding financial exposure which is an alternative name for risk is a crucial part of the investment process understanding financial exposureinvestors are always seeking to limit their financial exposure while trying to maximize profits which helps to maintain a balance of risk and reward for instance if 100 shares of stock purchased at 10 a share appreciated to 20 selling 50 shares would eliminate the financial exposure the original purchase cost the investor 1 000 as the shares appreciate selling 50 shares at 20 returns the investor s initial stake this method is what is meant by taking money off the table it is also sometimes colloquially referred to as playing with the house s money the only risk going forward would be for the profit made as the investor has already recouped the principal amount conversely if the stock decreased from the original purchase price of 10 to 5 per share the investor would have lost half the original principal amount financial exposure applies not only to investing in the stock market but exists whenever an individual stands to lose any of the principal value spent purchasing a home is an excellent example of financial exposure if the value of real estate declines and the homeowner sells at a lower price than the original purchase price the homeowner recognizes a loss on the investment reducing financial exposurethe simplest way to minimize financial exposure is to put money into principal protected investments with little to no risk certificates of deposit cds or savings accounts are two ways to reduce financial exposure drastically federal deposit insurance corporation fdic guarantees both the investment in cds and the savings account up to the qualified coverage amounts of 250 000 1however with no risk an investment provides little return also if there is little financial exposure this leaves a conservative investor vulnerable to other risks such as inflation another way to reduce financial exposure is to diversify among many investments and asset classes to build a less volatile portfolio an investor should have a combination of stocks bonds real estate and other various asset classes within equities there should be further diversification among sectors market capitalizations and exposure to domestic and international markets when an investor diversifies their portfolio successfully among many asset classes it should reduce overall volatility if the market turns bearish non correlating asset classes will minimize the downside hedging is another way to reduce financial exposure there are many ways to hedge a portfolio or an investment airlines purchase crude oil futures contracts at current prices in anticipation of future passenger load as a hedge later if oil prices skyrocket and cause the airline industry to raise ticket prices and shrink margins those hedged airlines may be able to maintain lower ticket prices and grab market share from the competition an investor can hedge in the stock market by using options inverse exchange traded funds or bear oriented funds gold is one of the most common hedges and it typically appreciates with an inflating dollar or volatile markets 