Maximum exposure limits are risk management tools used to help ensure the risk profile of an investment is spread wisely. Understanding maximum exposure limits gives you another way to analyze the qualities of any investment you might be considering, and adds another layer of wisdom to your investment decisions.
What Is Maximum Exposure?
Maximum exposure is the largest amount of money you could potentially lose in an investment scenario. Our short-term 10% note and our mid-term 12% note operate on a 5% maximum exposure rule. This means that a maximum of 5% of your capital is allocated to any single deal.
Let’s walk through an example
John is an individual investor who has a portfolio worth $100,000. He’s particularly bullish on TechCo, a technology company, and has decided to invest 50% of his portfolio ($50,000) into TechCo shares.
Scenario 1: TechCo’s Boom
TechCo releases an innovative product, and its stock soars by 20%. John’s investment in TechCo now becomes $60,000. He’s thrilled.
Scenario 2: TechCo’s Bust
Oh dear – TechCo faces a scandal that hurts its reputation, causing its stock to plummet by 40%. Now, John’s $50,000 investment in TechCo shrinks to $30,000. That’s a $20,000 loss. John is not thrilled.
In Scenario 2, John’s maximum exposure was essentially the full $50,000 he invested in TechCo, and he ended up losing $20,000 of it. Because he invested 50% of his portfolio into a single stock, he was highly exposed, and the TechCo scandal significantly impacted his portfolio.
Applying Maximum Exposure to Supervest and MCAs
With Supervest, the maximum exposure limit is set at 5% for any single cash advance. So, if John were to invest his $100,000 into Supervest’s MCA offerings, the most he could invest in a single advance would be $5,000.
This limitation minimizes his risk. Even if one of the cash advances doesn’t work out, the most John would lose is $5,000, or 5% of his total portfolio, rather than taking a significant hit like in his TechCo misadventure.
The concept of maximum exposure is all about understanding the largest loss you can face in an investment scenario.
How Supervest Manages Risk:
- Diversification Across Funding Companies: Supervest allows investors to spread their capital across different MCA funding companies.
- Diversification Across Thousands of Merchants: By distributing your investments, you can mitigate some of the risk of heavy losses if a merchant encounters financial hiccups.
- Limit of 5% Exposure to One Cash Advance: Simply put, no single investment can eat up more than 5% of your total portfolio on the platform.
Benefits of a Low Maximum Exposure Limit
There are some important potential upsides to having a more stringent exposure limit.
- Reduced Volatility: Smaller stakes in multiple places can translate to less drastic ups and downs overall.
- Protection Against Catastrophic Losses: Should one merchant or cash advance not go to plan, a low maximum exposure limit acts as a safety net.
- Peace of Mind: Yes, the emotional aspect of investing is real. A low maximum exposure limit lets you sleep better, knowing that your risks are managed.
Understanding maximum exposure limits is an integral part of smart investing. While it might not be the most glamorous part of your financial journey, it’s an important concept to get your head around and might be something you want to look into for any of your future investment options. Knowledge is power, and we hope this discussion empowers you to make informed decisions on your investment journey.
Find out more about how MCAs work here.