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.

RELATED TERMS
  1. Initial Margin

    The percentage of the purchase price of securities (that can ...
  2. Margin

    1. Borrowed money that is used to purchase securities. This practice ...
  3. Cash Trading

    Cash trading is a method of buying or selling securities by providing ...
  4. Minimum Margin

    Minimum margin is the initial amount required to be deposited ...
  5. Liquidation Margin

    Liquidation margin is the value of all of the equity positions ...
  6. Trading Account

    1. An account similar to a traditional bank account, holding ...
Related Articles
  1. Trading

    Margin Trading

    Find out what margin is, how margin calls work, the advantages of leverage and why using margin can be risky.
  2. Trading

    A Guide to Day Trading on Margin

    Buying on margin is a good option if you don't have the cash to day trade.
  3. Investing

    Leveraged Investment Showdown

    Margin loans, futures and ETF options can all mean better returns, but which one should you pick?
  4. Investing

    Leverage: Is It Good for Your Portfolio?

    Discover the concept of financial leverage. Learn multiple ways to get leverage in your portfolio, and decide if leverage is a good idea for you.
  5. Investing

    Spreading The Word About Portfolio Margin

    An underused opportunity provided in an SEC rule can enhance returns and lower risk for spread traders.
  6. Investing

    Covered Call Strategies for a Falling Market

    Find out how to come out on top, even when the market is dropping.
RELATED FAQS
  1. When looking at my online broker account, I see an account value, cash value and ...

    When looking at some online brokerage accounts, there are a few figures that may be confusing, including account value, cash ... Read Answer >>
  2. What's the difference between a cash account and a margin account?

    All transactions in a cash account must be made with available cash or long positions; a margin account allows investors ... Read Answer >>
  3. What is the difference between initial margin and maintenance margin?

    Learn the difference between an initial margin requirement and a maintenance margin requirement and how these affect an investor's ... Read Answer >>
  4. What are my options when I get a margin call?

    Understand what a margin call means and the two primary options for meeting a margin call, such as depositing additional ... Read Answer >>
Hot Definitions
  1. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  2. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  3. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  4. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
  5. Interest Coverage Ratio

    The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest ...
  6. Cash Conversion Cycle - CCC

    Cash conversion cycle (CCC) is a metric that expresses the length of time, in days, that it takes for a company to convert ...
Trading Center