Gearing allows 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 company gears, the higher the risk.
Investment companies 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 companies use gearing, and most use relatively low levels of gearing.
