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Gearing

The ratio of borrowed funds to the total value of a home or an investment property. (eg: you buy a property for $200,000, putting in 20% deposit ($40,000). The ratio of your own money versus borrowed money in an investment. Positive gearing is when you borrow to invest in an income producing asset and the returns (income) from that asset exceed the cost of borrowing.

Negative gearing is when you borrow to invest in an income producing asset and the cost of borrowing exceeds the returns (income) from that asset.Gearing is the amount of debt financing compared to equity financing in a company. If the company has low levels of debt compared to equity it has a low gearing ratio. Conversely, a high debt to equity ratio would be a highly geared company. Gearing can also be referred to as financial leverage.

Gearing, or 'leverage', as it is called in the USA, is the percentage of borrowing compared to the percentage of assets. In simpler terms, it means borrowing money, generally from a bank, in order to invest it. Investment trusts, both conventional and split capital, are able to do this because they are companies. The gearing ratio measures the percentage of capital employed that is financed by debt and long term finance

This page was compiled with information originally contributed by Lisa Dudson [1]