What is a characteristic of a geared investment?

Geared investments, often referred to as leveraged investments, are designed to amplify potential returns by using borrowed funds to invest. This characteristic allows investors to control larger investment positions than they could with their available capital alone. The use of leverage can lead to a significantly greater upside potential because if the investment performs well, the returns are calculated on the total amount invested, including borrowed capital.

However, this increased potential for returns comes with heightened downside risks. If the investment performs poorly, losses can also be magnified, as the investor is still responsible for repaying borrowed amounts regardless of whether the investment has yielded profits or losses. This dual nature of geared investments—enhanced profit potential alongside increased risk—is critical for investors to understand, as it highlights the importance of careful risk management and making informed investment decisions.

The other options do not accurately reflect the nature of geared investments. For instance, while geared investments can enhance returns, they do not reduce risks or guarantee fixed returns, nor do they eliminate the need for further capital, as investors might still need to inject additional funds to meet margin calls or manage liabilities associated with the leverage.