Buying Power

The term “buying power”, in trading and investing, describes a precise volume of money resources obtainable by an investor to be used for purchasing financial instruments. The term is usually used in relation to leveraged accounts, and in such case it means the amount of money in an account combined with all possible margin.

The expression might also be used to denote an available sum of money in cash accounts as well. It’s worth noting the change of buying power when it comes to other arrangement types, though.

To put it simple, the buying power is 200% of cash held in a typical margin account, and it is 400% of money in a day trading account. Nevertheless, it’s highly important for any trader to be aware that trading via said types of accounts might bring more benefits as well as greater risks, as potential losses are also magnified.

Buying Power main features

As buying power is usually associated with investing via leveraged margin accounts, it’s crucial to understand the main working principle of those accounts. Their main feature is that investors are allowed to use a certain sum of money their broker lends them (the amount of such sum may vary depending on a broker) to purchase securities, which might be stocks or other financial instruments. 

It is required by the regulatory authorities that the traders’ initial margin has to be 50% or more in such cases. Nonetheless, in some specific cases, other options are possible. So, the buying power provided by this type of account is usually twice larger than a sum of cash held in it.

Concerning day trading accounts, it’s necessary to note that there is a restriction in a form of a minimum equity amount, which is $25000. It also provides a possibility for a trader to fund only a quarter of security purchasing, and not a half of it, as in the previously mentioned type of account. So, the buying power associated with this account type is an amount of money in the account in question multiplied by four.

Finding out Buying Power

Buying power is equivalent to the volume of cash deposited in the account, in addition with the obtainable margin. So, it’s necessary to know the initial margin demand for an account. As it is often equal to 50%, let’s assume there’s a margin account with $200000 held in it, and an initial margin requirement for a certain trade is 50% (although other instances are also highly possible).

So, a sum of cash in the account needs to be divided by said percentage to find out the buying power. ($200000 / 50% = $400000). $400000 is the buying power in this hypothetical case.