What is buying power?
Buying power is the amount of money an investor can use to buy securities from a brokerage account. In plain terms it is the cash in the account plus any additional buying capacity the broker will extend (margin). In a cash-only account your buying power equals the cash balance. In a margin account you can often purchase more than your cash balance because the broker lends part of the purchase amount.
Key takeaways
– Buying power = cash available + any margin capacity provided by the broker.
– In a Regulation T (initial margin) margin account, the typical initial requirement is 50%, which effectively doubles how much you can buy relative to your cash.
– Pattern day trading rules give higher intraday buying power (commonly four times equity) but require minimum account equity.
– Greater buying power (leverage) increases both potential gains and potential losses and raises the chance of a margin call.
How buying power works (short explanation and formula)
– Cash account: buying power = cash balance.
– Margin account with an initial margin requirement M (expressed as a decimal): maximum purchasable value = cash / M.
– Example: if M = 0.50 (50%), max purchase = cash ÷ 0.50 = 2 × cash.
– Another way to think of buying power: broker displays the amount available to trade, which equals your cash plus the loan amount the broker will provide up to their allowed limit.
Buying power in margin accounts
– Brokers set margin limits based on their risk rules and the customer’s profile. Regulatory rules (like Reg T) set minimums for initial margin, but brokers can be stricter.
– If you use margin, your account value will move with the securities you hold. If the account equity falls close to the broker’s maintenance requirements, the broker may issue a margin call requiring you to add funds or sell positions.
Buying power in day trading accounts
– Day trading accounts that meet “pattern day trader” rules typically must keep a minimum equity (commonly $25,000). These accounts often allow a higher intraday buying power multiple because the trader is expected to close positions the same day.
– For example, if the intraday funding requirement is 25% (you must fund 25% of a position), you effectively have 1 ÷ 0.25 = 4 times your equity available for intraday trades.
Checklist before using buying power
– Confirm account type: cash, regular margin, or pattern day trading account.
– Ask your broker for the exact initial margin percentage they apply to new purchases.
– Verify the broker’s stated intraday buying power and any day-trading minimum equity requirement.
– Monitor your account’s equity vs. the broker’s maintenance margin to avoid surprise margin calls.
– Remember that higher buying power = higher leverage = larger upside and downside exposure.
Worked numeric examples
1) Simple margin-account example (standard initial margin = 50%)
– Situation: Alex has $100,000 in a margin account. Broker’s initial margin requirement M = 50% (0.50).
– Calculation: Maximum purchase value = cash ÷ M = $100,000 ÷ 0.50 = $200,000.
– Interpretation: Alex can open positions totaling up to $200,000. If positions fall in value, Alex’s margin cushion shrinks and a margin call becomes more likely.
2) Pattern day trading intraday buying power
– Situation: Sam has $50,000 in a day trading account that allows intraday funding of 25% per trade.
– Calculation: Intraday buying power = equity ÷ 0.25 = $50,000 ÷ 0.25 = $200,000.
– Interpretation: Sam may open intraday positions up to $200,000, provided positions are closed by the end of the trading day and account rules are met.
Risks to keep in mind
– Leverage magnifies losses as well as gains. If positions decline and account equity falls below maintenance requirements, the broker can issue a margin call and liquidate positions.
– Brokers may set initial or maintenance requirements higher than regulatory minimums.
Selected references
– Investopedia —
Selected references
– Investopedia — https://www.investopedia.com/terms/b/buyingpower.asp
– FINRA (Financial Industry Regulatory Authority) — Margin: https://www.finra.org/investors/learn-to-invest/types-investments/margin
– U.S. Securities and Exchange Commission (SEC) — Borrowing to Buy Stocks (Margin): https://www.sec.gov/reportspubs/investor-publications/investor-pubs-marginhtm.html
– Board of Governors of the Federal Reserve — Regulation T (credit by brokers and dealers): https://www.federalreserve.gov/supervisionreg/reg_t.htm
– Cboe — Margin Overview (exchange resources): https://www.cboe.com/trading-resources/margin/
Quick checklist before using margin
– Know your broker’s rules: initial margin, maintenance margin, interest rate, and pattern day trader (PDT) policy.
– Calculate buying power: cash ÷ initial margin requirement (example below).
– Plan exit/stop-loss levels and the dollar amount you can afford to lose.
– Monitor positions intraday and overnight; margin risk differs by holding period.
– Have spare excess equity to absorb adverse moves and avoid forced liquidation.
Formulas and worked examples
1) Buying-power formula (simple margin account)
– Buying power = cash / initial margin requirement
– Example: Reg T initial margin = 50%. If you have $10,000 cash:
– Buying power = $10,000 ÷ 0.50 = $20,000
– You can buy up to $20,000 of stock (using $10,000 cash + $10,000 loan).
2) Equity and margin-call test
– Equity = market value of securities − outstanding loan
– Maintenance requirement test: margin call occurs if
Equity < maintenance_margin_rate × market_value
– Example:
– Purchase: $20,000 market value, $10,000 loan → initial equity = $10,000.
– Price falls so market value = $12,500 → equity = 12,500 − 10,000 = $2,500.
– If maintenance requirement = 25%: required equity = 0.25 × 12,500 = $3,125.
– Since 2,500 < 3,125, broker may issue a margin call.
3) Amount needed to meet a margin call
– Required deposit = required_equity − current_equity
– Using the example above: required deposit = 3,125 − 2,500 = $625
– Alternatively, you may sell securities to reduce loan and restore required equity.
Intraday (pattern day trader) buying power reminder
– PDT rule commonly gives intraday buying power = equity ÷ 0.25 (4× leverage) for accounts flagged as pattern day traders with ≥ $25,000 equity.
– Example (from context): $50,000 equity → intraday buying
power = $200,000 (4 × $50,000). Intraday buying power is for same‑day trades only; if you carry an intraday‑entered position overnight, many brokers will convert it to a normal margin position or may restrict the account.
Buying power: other common cases and worked examples
1) Cash account vs. margin account (Regulation T)
– Reg T (Federal Reserve) sets the common initial margin rule: when you buy on margin, you must deposit 50% of the purchase price up front. This implies a simple buying‑power rule for purchases: buying power = cash × 2 (ignoring interest and existing debits).
– Example: cash balance = $10,000; in a margin account under Reg T you can buy up to $20,000 of stock (initially). If you actually buy $20,000 of stock, your loan = $10,000 and your equity = $10,000.
2) Long options (calls/puts)
– Long option position (buying calls or puts) is paid in full: buying power needed = option premium × 100 × number of contracts. Buying long options does not increase buying power; it consumes cash.
– Example: buy 10 call contracts, premium = $2.50 per share → cash required = 10 × 100 × $2.50 = $2,500.
3) Short (naked) options — margin formula (typical industry method)
– Writing (selling) uncovered options requires margin because losses can be large. A commonly used regulatory formula for short uncovered puts or calls is:
Required margin = max[(20% × S − amount OTM + option premium), (10% × S)] × 100
where S = current stock price and "amount OTM" = max(0, strike − S) for puts or max(0, S − strike) for calls.
– Worked example (short put): stock at $50, strike = $45 (option is in the money by $5, so amount OTM = 0), premium received = $2. Required margin = max[(0.20×50 − 0 + 2), (0.10×50)]×100 = max[(10 + 2), 5]×100 = $1,200. You must have that margin (or equivalent collateral) in your account while the position is open.
– Brokers may use stricter internal rules; they also apply maintenance margins (ongoing minimum equity).
4) Short stock and short selling buying power
– Short selling requires margin because you borrow shares to sell. The broker holds the sale proceeds and requires additional equity by rule. Maintenance requirements for short positions tend to be higher than for long positions and vary by broker and by stock volatility/price.
– Example concept: You short 100 shares at $50 → proceeds $5,000 are credited, but broker still requires you to post additional collateral (equity) according to their maintenance schedule. Exact formulas vary; always check your broker’s published rules.
5) Portfolio margin (alternative margining system)
– Portfolio margin evaluates risk across positions and can deliver larger buying power for diversified, hedged portfolios by using scenario‑based risk models rather than fixed percent rules.