Gearing allows investment trusts (investment companies) to magnify income and capital returns, but can also magnify losses.
At its simplest, gearing means borrowing money to buy more assets in the hope the company makes enough profit to pay back the debt and interest and leave something extra for shareholders.
However, if the investment portfolio doesn’t perform well, gearing can increase losses. The more an investment trust gears, the higher the risk.
Investment trusts can usually borrow at lower rates of interest than you’d get as an individual. They can also gear in other ways: for example, by using derivatives or issuing special shares called zero dividend preference shares.
Not all investment trusts use gearing, and most that do use modest levels.
