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The amount of liquidity you have available to buy securities is called buying power. It’s also known as excess equity, and refers not only to the cash available for buying assets but also the available margin for leveraged accounts. For instance, a standard margin account provides two times equity in buying power and a pattern day trading account provides four times equity in buying power.
We’ll cover examples of buying power in leveraged accounts and the differences between buying power and purchasing power, which are not synonymous terms.
Examples of buying power
The amount of leverage available to you depends on the brokerage firm that hosts your margin account. Generally speaking, most margin accounts offer buying power of two to one, and the regulatory minimum you must deposit in your account is $2,000. 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. In a Schwab account, for instance, you can check by clicking “buying power” on the trade page.
Day traders, on the other hand, have access to four times buying power. The SEC requires that pattern day traders (investors who execute four or more day trades in five consecutive business days), maintain a minimum equity of $25,000 in their margin account. That means if you have $30,000 in your margin account, your buying power could be $120,000.
Buying power vs. purchasing power
Buying power and purchasing power are not the same thing. Buying power is the amount of securities that you could purchase with a given amount of money, whereas purchasing power is how much a unit of currency will buy, such as how much you can purchase with one dollar.
Here’s more about purchasing power, including some related economic terms.
Purchasing Power Parity (PPP)
Purchasing power parity (PPP), also known as the law of one price, states that a unit of currency should have the same purchasing power around the world. PPP is usually measured by comparing a basket of goods and services in different countries, taking into account their exchange rates. It is used to compare the relative costs of living between countries.
PPP levels will vary based on the goods that the currency has the ability to purchase, which can be local, non-tradable goods and services, or tradable goods such as non-perishable commodities that can be sold on the international market.
Purchasing power and inflation
Inflation erodes purchasing power by decreasing the number of goods or services you can purchase with the same amount of money. For example, a carton of eggs that cost $3 six months ago might now cost $6 due to inflation.
Consumer Price Index (CPI)
The Consumer Price Index (CPI) is a measure of the average change in prices over time that consumers pay for a basket of goods and services. It’s calculated by the Bureau of Labor Statistics (BLS). The CPI is used to measure inflation and is one of the most popular measures of inflation and conversely, deflation. Purchasing power can be measured by comparing the price of a good or service against the CPI.
Bottom line
Buying power, also known as excess equity, is the cash available for buying assets and the available margin for leveraged accounts. Most margin accounts offer investors buying power at a two-to-one ratio, while pattern day traders generally have access to a four-to-one ratio.
FAQs
Buying power, also known as excess equity, is the cash available for buying assets and the available margin for leveraged accounts. Most margin accounts offer investors buying power at a two-to-one ratio, while pattern day traders generally have access to a four-to-one ratio.
What does buying power in investing mean? ›
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? ›
The meaning of buying power in the context of investment refers to the amount of money that an investor has available to buy securities. For example, an investor with $10,000 in their margin trading account and a 2:1 leverage ratio would have $20,000 in buying power.
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.
How do you explain purchasing power? ›
Purchasing power is the value of a currency expressed in terms of the number of goods or services that one unit of money can buy. It can weaken over time due to inflation. That's because rising prices effectively decrease the number of goods or services that one unit of money can buy.
Why is my buying power lower than my cash? ›
Buying Power = Cash – Open Orders
Your open orders are trades you've tried to place, but have not yet executed (for example, if you try to buy a stock while the markets are closed). If you have very low buying power, but lots of cash, chances are you have a big order sitting open.
Why is my option buying power so low? ›
Negative buying power implies you do not have adequate on-hand cash to hold all positions in your account. This may be indicative of a margin call. Best practice is to make cash available, or call your broker if the buying power calculation is faulty.
What happens if you hold day trade buying power overnight? ›
If you do day trade positions held overnight, it will create a day trade call that will reduce your account's leverage.
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].
How do you determine your buying power? ›
Your debt-to-income (DTI) ratio determines your purchasing power. Your DTI ratio is the comparison between: Your monthly income; and. How much you spend on outgoings e.g. bills.
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What increases buying power? ›
Buying power can be increased by slowing down the buying process and delaying purchases. If you can avoid impulse purchasing and unplanned spending, you will be in a better position to increase your buying power.
What is effective buying power? ›
Purchasing power includes true cash and margin power, which is the amount a broker wants to loan to an investor. For consumers, purchasing power is how much money they possess to purchase goods and services when they consider their regular expenses and income.
Why purchasing power is good? ›
The clearest way that purchasing power can impact you is by influencing your standard of living. If the purchasing power of your money declines, you will not be able to afford as much as you could before, meaning you will have less ability to buy the goods and services you need.
What is the purchasing power risk? ›
Inflation risk, also referred to as purchasing power risk, is the risk that inflation will undermine the real value of cash flows made from an investment. Inflation risk can be seen clearly with fixed-income investments.
What is the difference between buying and purchasing power? ›
Purchasing power, or buying power, refers to how much you can buy with a specific amount of money. It goes up and down over time according to various economic factors. Let's dig into how you can mitigate the risk to your purchasing power.
What is the difference between buying power and balance? ›
Cash balance represents the total balance of AUD or USD at a certain point in time. Buying power accounts for additional inflows and outflows of cash (pending orders, unsettled funds from a deposit or transaction, etc.) and represents funds available to invest or withdraw at a given time.
What does higher buying power mean? ›
A loss of purchasing power occurs when the value of money relative to costs decreases over time. This means the same amount of money can buy fewer goods and services than before. A gain in purchasing power occurs when the opposite happens, and the same amount of money can buy more goods and services than before.
What is the difference between buying power and available funds? ›
The buying power in a cash account is the maximum dollar amount that is available for placing trades. Settled funds, unsettled funds-available, and unsettled funds-unavailable are used to determine a cash account's buying power.
