Buying Power

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Buying Power: Definition and How It Works

Buying power (also called excess equity) is the amount an investor can use to purchase securities in a brokerage account. In plain terms, it’s the cash available plus any additional purchasing capacity provided by margin or leverage.

Key points

  • Buying power = cash available (in a cash account) or cash adjusted for margin/leverage (in a margin account).
  • Regulation T sets a typical initial margin requirement of 50%, which effectively gives standard margin accounts 2× buying power.
  • Pattern day trading rules reduce the required funding to 25%, producing up to 4× buying power for day traders who meet the minimum equity.
  • Greater buying power increases both potential gains and potential losses and raises the risk of margin calls.

How margin affects buying power

A margin account lets a broker extend credit to an investor based on the account’s cash and securities. The initial margin requirement determines how much the investor must fund:

  • If the initial margin requirement is 50% (Regulation T standard), an investor can buy up to twice their cash balance (2×).
  • If the initial margin requirement is 25% (pattern day trading), an investor can buy up to four times their equity (4×).
  • Some markets, like certain forex brokerages, offer much higher leverage (for example, up to 50:1), which greatly amplifies risk.

For a cash account, buying power equals the cash balance—no borrowed funds are used.

Examples

  1. Standard margin account
  2. Cash: $100,000
  3. Initial margin: 50%

  4. Buying power = $100,000 / 0.50 = $200,000 (2× leverage)

  5. Pattern day trading account

  6. Cash: $50,000
  7. Day-trading margin funding: 25%
  8. Buying power = $50,000 / 0.25 = $200,000 (4× leverage)

Risks and trade-offs

  • Leverage magnifies both profits and losses. Small adverse moves can substantially erode equity.
  • If account equity falls below maintenance requirements, the broker may issue a margin call requiring additional funds or forced liquidation of positions.
  • Higher leverage reduces the buffer before a margin call and can make recovery from losses more difficult.

Practical takeaway

Know your account type and the applicable margin rules before using buying power. Use leverage deliberately and maintain sufficient equity cushions to manage the elevated risk of margin calls and amplified losses.