What is Buying Power?
Buying power, also referred to as excess equity, is the money an investor has available to buy securities in a trading context. Buying power equals the total cash held in the brokerage account plus all available margin.
Key Takeaways
- Buying power is the money an investor has available to purchase securities.
- Buying power equals the total cash held in the brokerage account plus all available margin.
- A standard margin account provides two times equity in buying power.
- A pattern day trading account provides four times equity in buying power.
- Additional buying power magnifies both profits and losses.
How Buying Power Works
Whilebuying power can take on a different meaning depending on the context or industry, in finance, buying power refers to the amount of money available for investors to purchase securities in a leveraged account. This is referred to as a margin account, as traders take out a loan based on the amount of cash held in their brokerage account. Regulation T, established by the Federal Reserve Board (FRB), mandates that an investor’s initial margin requirement in this account type must be at least 50%, meaning the trader has two times buying power.
Buying Power of Margin Accounts
The amount of margin a brokerage firm can offer a particular customer depends on the firm's risk parameters and the customer. Typically, equity margin accounts offer investors twice as much as the cash held in the account, although some forex broker margin accounts offer buying power of up to 50:1.
The more leverage a brokerage house gives an investor, the harder it is to recover from a margin call. In other words, leverage gives the investor an opportunity to make increased gains with the use of more buying power, but it also increases the risk of having to cover the loan. For a non-margin account or cash account, the buying power is equal to the amount of cash in the account. For example, if a non-margin account has $10,000, that is the investor's buying power.
Buying Power of Day Trading Accounts
Pattern day trading accounts work differently to regular margin accounts in that they require a minimum equity requirement of $25,000, as opposed to $2,000. While a trader has to finance 50% of their stock positions in a standard margin account - which provides two times equity in buying power, they only have to fund 25% of the cost of securities purchased in a pattern day trading account – giving the trader four times equity buying power.
For example, suppose Sam has $50,000 in a day trading account; they could purchase up to $200,000 worth of open trades within the trading day (50,000 x 4 = $200,000 buying power).
Example of Buying Power
Let’s assume Alex has $100,000 in a brokerage margin account and wants to purchase shares in Apple Inc. (AAPL). Alex's initial margin requirement is 50% to enter a trade – some brokers may have an initial margin requirement greater than 50%.
To calculate Alex's total buying power, divide the amount of cash in the brokerage account by the initial margin percentage. Here, divide the cash balance of $100,000 by 50%. As a result, Alex can purchase up to $200,000 worth of Apple shares. ($100,000 / 50% = $200,000). That said,the value of the margin account changes with the value of the securities held. The closer it gets to the margin limits, the greater chance Alex has of receiving a margin call.
FAQs
Buying power is the money an investor has available to purchase securities. Buying power equals the total cash held in the brokerage account plus all available margin. A standard margin account provides two times equity in buying power. A pattern day trading account provides four times equity in buying power.
What is an example of buying power? ›
Examples of buying power
For example, if you have $3,000 in a margin account, you could leverage a total of $6,000 to buy marginable stock. Some brokerage firms will offer more buying power, but it depends on the firm and the investor.
What is an example of day trading buying power? ›
Here's an example: if you start the day with cash plus firm maintenance excess of $3,000.00, your day trading buying power would be $10,000.00 ($3,000.00/0.30 = $10,000.00). In this example, you can buy 100 XYZ shares for $6,000, and 100 ABC shares for $4,000.
What does buying power mean in SoFi? ›
The components of buying power include settled cash, cash from recent transactions that have not yet settled, incoming wires and any instant funding from pending ACH deposits. Mobile App. On the SoFi mobile app, buying power is displayed near the Performance summary section and also on the order entry page.
What is an example of buying power margin? ›
For example, if you had $5,000 cash in a margin-approved brokerage account, you could buy up to $10,000 worth of marginable stock: You would use your cash to buy the first $5,000 worth, and your brokerage firm would lend you another $5,000 for the rest, with the marginable stock you purchased serving as collateral.
What is excess equity? ›
Excess Equity means a portion of Assets of the Client that is in excess of the amount required to be maintained at the rate prescribed by the Company. “Assets of the Client” (other than the Derivatives Trading) means the net assets of the Client after deducting any Obligation that the Client owes the Company.
What is buying power for dummies? ›
Buying power is the money an investor has available to purchase securities. Buying power equals the total cash held in the brokerage account plus all available margin. A standard margin account provides two times equity in buying power. A pattern day trading account provides four times equity in buying power.
Can I trade with buying power? ›
If you don't have enough buying power to place a trade, you can't place the trade (simple as that). For example, if you want to buy $10,000 worth of stock but you only have $5,000 buying power, the trade will generally not go through.
How to increase buying power in stocks? ›
A higher net worth of your stock trading account and a good record of ACH deposits can help increase your instant buying power limits. You can check your maximum instant buying power via [Deposit > Deposit via ACH > Instant Buying Power].
Why is my day trade buying power so low? ›
It is NOT your cash balance. A number of things can affect how much buying power you have, but the basic idea is that you might have cash you've already set aside for another purchase, you might have the ability to borrow money for trades, or you might have some of your buying power tied up in “Margin Requirements”.
When you receive buying power does not affect when your funds settle and can be withdrawn. Funds from deposits settle and become available for withdrawal 3 business days after the deposit begins processing.
How to fix negative buying power? ›
If you have a negative buying power due to a Market on Open order overbuying in your account, you will want to make a new deposit or you can sell some of your investments to cover the negative buying power.
Why can't I withdraw my buying power on SoFi? ›
Any new deposit made into a SoFi Invest account is placed on a five-business-day hold. The sixth business day is when your funds are available to be withdrawn. You are still able to make purchases and place trades during this holding period.
Why is my option buying power negative? ›
A negative buying power might indicate a margin call. A portfolio margin-permissioned account also allows the trader to review the buying power impact of a trade in the confirmation dialog box. Portfolio margining involves a great deal more risk than cash accounts and is not suitable for all investors.
What is the formula for buying power? ›
Here's what the equation looks like: Buying Power Index = 0.5 (the market's percentage of U.S. effective buying income) + 0.3 (the market's percentage of U.S. retail sales) + 0.2 (the market's percentage of U.S. population).
What is the maximum buying power? ›
Buying Power is the maximum value of new securities that may be purchased on the account. Under the margin account , the maximum buying power is 4x the available funds, assuming a security has a margin requirement of 25%.
What is an example of buyer power? ›
What is buyer power? Buyer power refers to a customer's ability to reduce prices, improve quality, or “generally play industry participants off one another.” Buyer power examples include larger and influential customers demanding higher-quality products for lower prices.
What does it mean to buy power? ›
buying power | Business English
the ability of a person, group, or company to buy things, or the amount of money they have available to spend: Any rival is unlikely to touch the buying power of such a large corporation.
What is an example of spending power? ›
Meaning of spending power in English
the degree to which people have money to buy products and services: The growth in employment and wages gives consumers some spending power to absorb the higher cost of energy.
What is an example of a power to a product? ›
For example, the value 3 to the power of 4 is written as 3 4 , where 3 is the base and 4 is the exponent. This value indicates that the number 3 will be repeated 4 times in a multiplication expression (3*3*3*3). This product results in 81, which means that 3 4 = 81 .
