Thought gearing was something to do with cars, or bikes? Not when it comes to investing! In this case, it’s about borrowing money to invest. Guest blogger, Faith Archer, tells us why she thinks this is a secret weapon in her post on why she likes investment trusts.
Also known as 'leverage', gearing is borrowing money to invest in something that you believe might go up in value; to generate a return greater than the cost of the borrowing.
A mortgage is an everyday example of gearing.
Like house buyers, fund managers may also borrow cash from a financial institution. Their aim, is to add the loaned cash to the investors' money they already have, to make more of an opportunity they've spotted.
Those managers need to deploy the money wisely, to ensure a return that's higher than the cost of borrowing that cash.