Buying Power: An Investor's Ability to Make Purchases

Buying power is a term that refers to the amount of money an investor has available to make security purchases. This purchasing power is derived from two primary sources: cash held in the account and available margin. Available margin is the difference between the securities the account holds and the amount of trading activity the account can accommodate before the account must be replenished.

The amount of buying power an account delivers is based on the type of account the investor has. With a standard margin account, the investor generally has twice the amount of the account’s equity available for purchase. This is known as two times equity buying power. The more aggressive a portfolio, the higher the buying power offered by the account.

A pattern day trader account offers an investor four times the value of equity in buying power. While this account type provides more funds for trading and increases potential profits of the portfolio, it also amplifies potential losses.

Having a higher buying power is a great way to increase the potential return of an investment portfolio. However, investors must use caution and be aware of the added risk of loss associated with additional leverage.

At the end of the day, buying power is an important part of successful investing as it allows an investor to capitalize on opportunities with greater ease. With sensible risk management, investors can take advantage of volatile markets while minimising their downside exposure.