DEFINITION of Borrowing Power Of Securities
Borrowing power of securities is the amount associated with being able to invest in securities on margin, or being able to use securities as collateral in other transactions, such as taking on a broker loan. The borrowing power of securities is updated daily in an investor's margin account, and listed on the investor’s monthly brokerage statement, with margin limits varying but typically not greater than half of the value of the security.
BREAKING DOWN Borrowing Power Of Securities
A share of stock represents a share in a company, and is an asset that a shareholder can buy or sell whenever he or she sees fit. While not the same as a physical good, such as a commodity, or real estate, the asset is liquid and can be used as collateral like any other asset. Using securities as collateral is more complicated than using a physical asset, as the price of a security can fluctuate rapidly depending on market conditions. The value of the loan is dependent on the type of security, such as a stock or bond, and the policy of the lender regarding collateral.
Just as a homeowner can purchase a home using a loan, investors can purchase securities using borrowed money. Paying for securities purchased on margin depends on whether the investor is authorized to have a margin account, with the amount of margin being dependent on the investor’s ability to pay back what is borrowed. Unlike using a mortgage to purchase a house, the amount of time that an investor has to pay back what is borrowed is much briefer. The total amount that can be borrowed also tends to be lower, with the value of margin typically not exceeding 50% of the value of the amount of securities that the investor has in his or her account, as governed by Regulation T of the Federal Reserve Board. The percentage of margin to the total value of securities is shown on the brokerage account statement that the investor periodically receives.