While day trading buying power can make your trades more profitable, it can also be a risk. It can increase the chances of losing money. As such, you must tread with caution. The most important is to be familiar with how it works. This quick guide will help you understand the concept.
What is Day Trading Buying Power?
You can qualify for day trading buying power if you have a margin account. In a nutshell, the latter is the capital amount currently available for trading within the day. Depending on the account, you’ll also need to deduct self-regulatory organization requirements.
Further, it’s your available excess maintenance margin multiplied by four.
For example, if your account has $25,000, it means your buying power is $100,000. It’s the industry standard, but such may not always be the case. Brokers can lessen your leverage depending on individual factors, including risk tolerance.
Moreover, it’s critical to note that it changes during the business day’s closing. It can reflect a new amount every morning.
Another crucial concept you must learn is the buying power call. It triggers when you exceed your buying power. Once you receive a call, you’ll have up to five days to settle your balance. Therefore, you must fund your business account. Otherwise, you’ll have the risk of being restricted.
Note the differences from one platform to another. For instance, day trading buying power TD Ameritrade can vary from others. So, do your research if you want to be sure.
What is a Margin Account?
You need a margin account to maximize the benefits of day trading.
Your broker will set it up. In turn, this is where you can borrow capital to buy shares. Taking money out of your account is prohibited. Instead, it’s strictly for buying and selling shares. In addition, your margin account comes with collateral. These are your portfolio’s shares.
Know the rules before you start a margin account.
Organizations like the United States Federal Reserves Board and the Financial Industry Regulatory Authority are some agencies implementing rules.
People open margin accounts for many reasons. For instance, it can increase purchasing power and consolidate high-interest loans. It also has the potential for capital appreciation. Not to mention, it may come with competitive interest rates.
Day Trading Buying Power Rules
Before you start, it’s crucial that you’re aware of the rules. Otherwise, you risk losing a significant amount. It could also mean facing penalties and being unable to trade as you wish.
Among others, one of the most important rules is the minimum account size. It must be $25,000. This is the money that you must have in your account at all times. Nonetheless, it does not only include cash but also securities. Falling below the minimum results in account restrictions.
Restoration is done only after depositing the necessary amount.
More so, it is classified as pattern day trading. For those who don’t know, it means that you should have at least four-day trades in five business days. If your account is below the minimum, you can trade only three times. Once it reaches $25,000, you can trade more times.
You must also note that the rules are from the Financial Industry Regulation Authority. The latter provides valuable resources that will help you start on the right foot. Knowledge of their regulations is crucial for maximizing trading returns.
Another rule is that you cannot increase your buying power by making same-day deposits. As previously noted, the basis is the closing balance of the previous trading day. Therefore, any recent addition during the day does not qualify. The increase reflects only on the succeeding day.
In addition, the brokerage has the right to charge commissions as they deem fit. You might sustain losses as a result, which you must be responsible for. The firm can also liquidate available shares.
Lastly, you must meet the margin call when your account is below the minimum requirement. The failure to meet this translates into closing open positions, bringing your account back to the minimum value.
The Risks of Trading with Margin
While margin trading has several benefits, it also comes with drawbacks. It’s risky, especially if you lack appropriate knowledge.
One of the most significant risks is the possibility of huge losses. It can magnify your return, but it can also amplify your loss. You might lose more than your initial investment, which can be a nightmare for new investors.
More so, margin trading also poses the risk of a margin call. The latter is when your broker calls and asks to add more money to your trading account. In turn, this will let you reach your maintenance level.
Liquidation is another risk that can confront traders. Evaluate the loan agreement to know the terms and conditions. Breaking such can result in an unfortunate action. For instance, the brokerage can liquidate any remaining amount in your account if you do not meet the margin call.
Avoid these risks by being a responsible margin account holder. Be vigilant and read the terms of the agreement. Don’t hesitate to ask the brokerage if there’s anything unclear. Make sure to meet margin calls when necessary.
Where Can I Find My Starting Day Trade Buying Power?
It depends n the platform you’re using. More so, it can vary whether you’re using a mobile app or a website. In most cases, however, you’ll find it in the lower section below pending cash.
You can also compute it manually. It’s four times your account’s closing balance from the previous day. Any deposit made overnight or during the current day will not form part of your buying power.