Financial Dictionary.

This is a browseable and searchable reference tool for terminology relating to UK-based personal finance and financial products.

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Gearing

Definition: In general term, this is a reference to the amount of debt with a company's balance sheet in proportion to its assets. When used in reference to Investment Trusts, this refers to the amount of outstanding loans in proportion to the value of the trust's investment holdings. Because Investment Trusts are quoted companies they can borrow for commercial purposes - i.e. to purchase more investments. If the purchased investments perform well, they can repay the loans AND benefit their shareholders. However, if the investments perform badly, this will have a significant impact on the share price, as not only has the value of underlying holdings fallen, but the loans still have to be repaid. The higher the gearing ratio of a Trust, the more volatile and high risk it is perceived to be.

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Financial Dictionary.