In economics, What is gearing?

Answer 1

Negative gearing is a form of financial leverage where an investor borrows money to buy an asset, but the income generated by that asset does not cover the interest on the loan. (When the income does cover the interest it is called positive gearing.)

A negative gearing strategy can only make a profit if the asset rises in value by enough to cover the shortfall between the income and interest which the investor suffers. The investor must also be able to fund that shortfall until the asset is sold. The tax treatment of interest expenses and future gain will affect the investor's final return too. Tax rules vary from country to country.

Negative gearing on property is only found in Canada, Australia, and New Zealand.

Answer 2

Gearing is the ration of assets to borrowings, It is used to judge the liquidity of a business and generally used in a four year comparison to show the success or failings of a company. Normally a positive gearing is desired so that assets should exceed borrowings. For example if gearing was 2:1 then your assets would be twice the borrowing. Over the four year chart it would be hoped that the ratio would improve as the business progresses. If borrowing increases then assets should also in that if the borrowing covers capital items or stock then they should improve the assets base and capital account. If the trend worsens than it could indicate that losses are being made in which case two solutions are available. One is to cut costs and the other is to increase prices. A desirable trend would be 2:1, 2.25:1, 2.45:1. 2.5:1 showing an improvement each year.

Do not confuse 'gearing' with 'negative gearing' which is a different thing altogether being a strategy in some countries where borrowings are used to buy, generally, a building for rent with the asset incurring costs before any profits are made. This is not 'gearing' as understood in normal accounting procedures.

Answer 3

Thinking its where you are paying interest. Highly geared means that youre paying too much interest and your business is at risk. Not really economics but more of a Business aspect to gearing.

Answer 4

It is where an investor invests their own money in an investment, but also borrows money to make a further investment in the same thing. This means that whatever profits they make will be amplified, and whatever losses also amplified. So it is a bit like they are investing in a higher gear.

Taken all the way, investors can enter into "futures contracts", a type of derivative, where the profits and losses they make are 100% from borrowed money, and they don't have to invest any of their own money in the investment themselves at all. All they have to do is put up some money (called "margin") to be available to cover any losses they make.