Gearing

Gearing is, strictly-speaking, 'the percentage of borrowing relative to assets'.

So, in simple terms, if you own a home worth £100,000 and you have a mortgage outstanding of £50,000, your 'gearing' is 50%.

In the sphere of collective investments , investment trusts can borrow money (gear up) whereas unit trusts are not permitted to.

Split Capital Investment Trusts have structural gearing, because they contain different classes of share with different entitlements.

Gearing (called leverage in the U.S.) needs to be managed carefully - it can at best, enhance investment returns - and at worst increase losses.

Last Updated: August 2007 © Moneyextra.com

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