how buying power works
while buying 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 1buying power of margin accountsthe 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 accountspattern 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 powerlet 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 