For instance, if you have $10,000 in your account, that’s the maximum you can spend in a given time.
What if we told you that there’s another way?
Well, there is! A margin account lets you lend money from the broker to trade in stocks, securities, and so on. Your margin purchasing power is thus the amount of money you can spend on securities.
This is not all your own money, but is instead, partly borrowed from the broker.
So, what is buying power in stocks when you’re using a margin account?
We’ll answer just that!
Understanding Buying Power in Stocks: What You Need to Know
Purchasing power is the amount of money that a trader can spend on a given trade.
If they’re using a cash account, that’s the amount that they have deposited in their account. However, in the case of a margin account, a separate concept, margin purchasing power, becomes applicable.
In some cases, brokers can lend you as much as you can deposit — this is called a 50% margin. This swells up your buying power to become twice as much as you would be able to hold in a cash account.
Hopefully, this answers the question “What is margin purchasing power?”
Exploring Brokerage Options for Quick Access to Funds
Reliable international brokers can match your deposits, and in some cases, give you many times more than you would be able to contribute yourself. For instance, some Forex trading accounts have margins of 50:1 meaning that by leveraging in a small amount, you can borrow 50 times as much from the broker.
However, for most margin trading accounts, the margin is 50%.
To better understand this, consider that you have $10,000 in your account.
You need to know your instant buying power brokerage, here’s how it works: $10,000/50% = $20,000.
Thus, by contributing $10,000 to your margin account, you can trade with twice as much when your broker lends you money.
Hopefully, by now you understand how to increase buying power in stocks.
Decoding the Meaning of Buying Power in Stocks
Buying power for margin accounts thus is the total amount that you can spend and not the total amount that you have deposited. Unlike a cash account, margin account buying power lets you spend more than you can contribute yourself.
While this lets you stake in more money and win bigger profits (if you trade smartly), the opposite is also true. If you lose money, you must repay your broker the amount lost. Repaying this loan can be harder for some, other than others.
If you’re not all too confident using someone else’s money, you can stick to a simple cash account and spend what you can afford.
Buying Power in Stocks: Explained for Traders
Let’s take a look at margin buying power for stocks with an example of how instant buying power Robinhood works.
You want to buy a certain stock that has a 30% margin requirement.
How do you do that?
Well, if you want to buy $10,000 worth of that stock, you only have to stake in $7,000 of your own money. The 30% remainder will be covered by the broker. This way, you can buy $10,000 worth of stock by only spending $7,000.
Now imagine that $7,000 is your total balance.
With a cash account, you’d only be able to spend this much, but with a margin account, you can afford to spend more. However, this does come with extra risks too, especially if you lose money!
Margin Account Purchasing Power: Key Concepts and Usage
Now that you know what does buying power mean in stocks, let’s take a final look at margin account buying power. Your best bet is to stick to a cash account if you’re not confident about your trades.
A cash account will restrict how much you can spend, and you’d be barred from day trading.
But if you’re confident, go ahead and day trade with a margin account!