Gearing

In options trading, the term gearing denotes a figure obtained by dividing the price of the underlying asset of an option by the price of the option to determine the amount of leverage used.

In trading, the term gearing is often used synonymously with the term leveraging and refers to the practice of borrowing money from securities brokers in order to multiply gains. A gearing ratio, also called a leverage ratio, indicates the amount of money borrowed in relation to capital invested. The higher the investor’s assets in relation to the money borrowed from the broker, the lower the gearing ratio. The lower the investor’s assets in relation to the money borrowed from the broker, the higher the gearing ratio.

In a broader sense, the terms gearing and gearing ratio can be used in reference to debt other than leverage provided by securities brokers. The gearing ratio of a company, for example, denotes its assets in relation to its debts.

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