What is 'Buying Power'
Buying power, also referred to as excess equity, is the money an investor has available to buy securities. In a margin account, the buying power is the total cash held in the brokerage account plus maximum margin available. For example, if you have $1,000 cash in a margin account and the maximum margin rate is 50%, then your total buying power is $2,000.
BREAKING DOWN 'Buying Power'
Buying power can take on a different meaning depending on the context or industry. From a retailer or business perspective, buying power, or buyer bargaining power, gives the company leverage to dictate, and possibly lower, costs, which has a direct impact on pricing. The more a company can purchase from a supplier, the larger the discount the supplier can provide to its customer. In fact, large discount retailers use and count on this equation to achieve strategic goals related to cost savings. In the world of trading and investments, however, 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 are allowed to take out a loan based on the amount of cash held in the brokerage account.
Buying Power of Margin Accounts
The amount a brokerage can margin a particular customer depends on the brokerage house and the customer. Some margin accounts offer investors twice as much as the cash held in the account. Other margin accounts offer much more. 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 nonmargin account, the buying power is equal to the amount of cash in the account.
For example, assume an investor has $100,000 worth of cash in a brokerage account. The investor wants to purchase common shares in company A. If the investor's initial margin is set at 50%, it means the margin buying power is calculated by dividing the amount of cash in the brokerage account by the margin percentage. In this case the margin buying power is $100,000 divided by 50%, or $200,000. The investor can purchase $70,000 of company A with cash and $30,000 of company A on margin, and still have $100,000 in buying power to purchase shares in another company. The value of the margin account changes with the value of the securities held.