Position

Position refers to the amount of (or amount of exposure to) of a security, commodity, investment, or currency that held or owned by a person or entity. A position may also be established in an instrument such as a derivative (that in turn, gives an exposure to an underlying asset or variable).

In relation to an entity’s financial statements, a financial position is the balances of its recorded assets, liabilities, and equity (broadly the elements of its statement of financial position/ balance sheet) at a specific point in time. The financial position reflects the leverage, solvency, and cash standing of an entity which constitute the very underpinnings on which its continuity in operation depends.

Position can either be long (long position) or short (short position). A long position is established when an investor purchases a stock on expectation its price will rise, he is said to have taken a long (or covered) position. It is sometimes known as being “long the market”. “Bullish” investors – who are optimistic about the market- will take a long position, in anticipation of higher prices in the period to come.

A long position is usually taken by those investors who subscribe to the theory of “buying cheap and selling dear” (buying low and selling high). So, the position holder owns (buys and holds) the asset (stock, bond, etc.) and makes his profit when expectations come true with the price going up. Investors, basically, are long-position holders. Therefore, an investor with a long position receives delivery of the underlying asset (actual commodity, instrument, or share) if he holds the position into the delivery period (instead of offsetting it with a counter-contract).

A short position is created when an investor is pessimistic (bearish) on the price of an asset, on expectation its price will fall, he is then said to have taken a short position. However, having a short position in an asset may signal a few different meanings. A short position in a share of stock usually indicates that the investor has sold shares he doesn’t own (by borrowing them against a premium) with the intention of giving them back later to the lender. In this case he purchases other identical shares, later, at a lower price, and hereby closes out the short position, taking the difference for profit.

Exposure

Exposure is a general term that has different meanings in different contexts. It may refer to the total market value of a position, the total amount of capital or investment that is exposed to risk at any given point, or the portion of a portfolio or fund invested in a certain market or set of assets. Exposures may take two main forms: financial exposures and market exposures.

Financial exposure is the amount of capital (or principal amount) that an investor stands to lose on investing in a venture, an asset, or an operation. When investing, financial exposure is limited to the amount that an investor spends on opening a position– for example, if you invest in shares which become completely worthless, the investor will only lose the amount put into investment.

Market exposure describes the portion of a fund or portfolio that is invested in a certain industry, sector or asset.

Generally speaking, exposure refers to the amount of money that an investor (corporate or individual) has invested in a particular operation or asset. It represents the amount of money that the investor stands to lose on an investment vis-à-vis the expected return from that investment. Financial exposure is expressed in absolute monetary terms, or as a percentage of the funds invested.

By specific nature, exposure is tied to risk. Whether investing or trading, observing financial exposure on a regular basis is an essential element in the process of managing risk.

Major differences

Both position and exposure can be interchangeably to denote the same meaning. However, there is a thin line of distinction between the two concepts. A position is more specific as it defines a direction taken as to a certain market, in either direction. An exposure, on the other hand, is broader in the sense that it relates to risk taking and the expectation of favorable market developments or specific financial performance for return generation. Gross exposure refers to the absolute level of an investment, considering the value of both a fund’s long positions and short positions.

In practice, an investor or trader’s portfolio can consist of different asset classes, such as commodities, shares and currencies. A single position can be exposed to multiple markets (hence it is said to have multiple exposures). For example, if an investor has shares in a gold-producing company, the investor would not only be exposed to the stock market, but also to the commodity market and possibility the foreign exchange market if the producer has global operations.

Exposure can be amplified with the use of leverage, because capital will also increase beyond the initial outlay, (in trading this is known as margin (deposit)). With leverage, profit and losses can also be magnified.