Risk Associated with Gearing free Samples †MyAssignmenthelp.com

Question: Discuss about the Risk Associated with Gearing. Answer: Gearing meaning In simple terms gearing means borrowing of money by an investor with the motive to invest at higher rate than the rate at which it has been borrowed. So that investor can earn margin amount. Investor can invest in shares, managed investments and properties(Anon., n.d.). Risk involved in gearing: The equation of gearing is such that it involves the risk for investor of ending up having negative gearing. Negative gearing means when the interest amount earned on investments is less than the interest paid on the amount which investor has borrowed to invest. For example: the rental amount earned on the property is less than the interest amount which is required to be paid on the loan which was borrowed to purchase that property. There are several factors which can lead to negative gearing such as: Investor had high expectation of return from the investment but in reality he got low return on investment as expected. Therefore investor should invest carefully, provided investments should be genuine. Investor should keep a proper balance between the borrowed amount and his own capital in respect of making investment. If investor over extend his borrowing then interest rates might increase and that can lead to negative gearing. There might be chances where investments may provide less income, no income or may be capital loss. Investor should plan his portfolio in such a manner that he is able to liquidate few of his investments to pay off loan(Anon., n.d.). Example An investor invested 100000. He borrowed the amount at 7% interest rate: Earned 10% on investment Earned 5% on investment Situation a there is profit of 3% (10-7) = 3000 (3%*100000) Situation b there is loss of 2% (7-5) = 2000 (2%*100000) Bibliography Anon., n.d. Risks and benefits of gearing. [Online] Available at: https://www.dover.com.au/dover-way/part-09-managing-debt/chapter-04-risks-and-benefits-of-gearing/ [Accessed September 2017]. Anon., n.d. Understanding gearing. [Online] Available at: https://www.mlc.com.au/understandingseries/understanding_gearing.pdf [Accessed September 2017].