Borrowed weight on a smaller base:gearing is leverage by another face.
Another term for leverage: the size of the position a trader controls relative to the capital behind it.
Higher gearing means greater exposure relative to the margin deposited.
In plain words
Gearing is another word for leverage. It compares the size of the position a trader controls with the trader’s own money that supports it: a position worth 50,000 backed by 1,000 of the trader’s own money is geared 50 times.
See it move
Own money moves a little: Position moves several times as far
Why it matters
The word appears mainly in British usage and means the same thing as leverage. The higher the gearing, the larger the gain or loss that a given price move produces relative to the money put up.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
A trader puts up 2,000 of their own money to hold a position with a full value of 40,000.
- 1Gearing40,000 ÷ 2,000 = 20, written 1:20 or 20 times
- 2A 1% move in the price changes the position’s value by 40,000 × 0.01 = 400
- 3As a share of the trader’s own money400 ÷ 2,000 = 0.20, or 20%
At 20 times gearing, a 1% price move is a 20% gain or loss on the money put up.
A common mistake
Some read high gearing as a way of earning more from the same money. It enlarges losses by exactly the same factor as gains, so the same adverse move removes a larger part of the account.
Check yourself
Educational information, not investment advice or a recommendation to trade.