Gearing and Negative Gearing

The purpose of this paper is to clarify some aspects of geared investments which are investments partially financed from a loan. Gearing is a standard tool of investment and although it is usually applied to property or share portfolios, the approach can be applied to any asset. Some investors are resistant to it because they think it is risky, but the same people have often made large leveraged investments in the family home.The second section of the paper outlines the basics of gearing and the factors that affect the return earned on a leveraged asset holding. The third section demonstrates that a share portfolio can contain quot;hidden leveragequot;. The fourth section looks at margin loans. The fifth section considers instruments which provide leverage without requiring an explicit loan. They are particularly useful for superannuation funds which are not permitted to borrow