"Buying power" is the total dollar amount of securities you can purchase using the combination of your available cash and the maximum allowed margin. For a beginner, understanding how to calculate and manage buying power is the difference between a controlled investment strategy and an accidental financial disaster.

Calculating Standard Buying Power

In a standard margin account under Reg T, your buying power is generally double the amount of cash you have available for investment. This is because the 50% initial margin requirement allows you to borrow $1 for every $1 you own .

The Buying Power Formula:

Buying Power = Available Cash / Initial Margin Requirement Percentage

If you have $10,000 in cash and the initial margin requirement is 50% (0.50):

$10,000 / 0.50 = $20,000 in total buying power.

In this scenario, you can buy $20,000 worth of stock. You are using $10,000 of your own money and $10,000 of the broker's money.

The Daily Fluctuation of Buying Power

It is a common misconception that buying power is a static number. In reality, your buying power changes every day—and even every minute—based on the market value of the securities you already hold in your account .

If the stocks you hold as collateral increase in value, your equity increases. Because you have more equity, the broker is willing to lend you more money, thus increasing your buying power. Conversely, if your stocks drop in value, your collateral is worth less, and your buying power shrinks. This can create a "vicious cycle" during market crashes: as stock prices fall, your buying power disappears, potentially forcing you to sell at the bottom.

The Cost of Borrowing: Interest Rates

Margin is not free money. It is a loan, and like any loan, it carries an interest rate. This interest is typically calculated daily and charged to your account monthly .

How Interest Accrues

Brokerages usually charge a "base rate" plus a "markup." For example, if the base rate is 5% and the broker's markup is 3%, your total margin interest rate is 8% per year.

If you borrow $10,000 at an 8% annual rate, you will owe approximately $800 in interest over a year.
On a daily basis, this is roughly $2.19 ($800 / 365 days).

While $2.19 a day sounds small, it adds up. If you hold a margin position for several years, the interest costs can eat away a significant portion of your profits. This is why margin is primarily recommended for short-term investments .

The "Break-Even" Hurdle

When you invest with margin, your investment must perform better than the interest rate just for you to break even. If your margin interest rate is 8% and your stock only gains 5% in a year, you have actually lost money on the trade, even though the stock price went up.

Non-Marginable Securities: The Exceptions

Not every asset in your portfolio contributes to your buying power. Regulators and brokers designate certain high-risk securities as "non-marginable." This means you must pay for them with 100% cash, and they cannot be used as collateral to borrow money for other trades .

Common non-marginable securities include:

Penny Stocks: Stocks trading under $5.00 or those not listed on major exchanges like the NYSE or Nasdaq .
IPOs: Initial Public Offerings are often restricted for the first 30 days of trading due to extreme volatility .
Options: While you need a margin account to trade certain option strategies, the options themselves often have no "loan value."
Cryptocurrency: Most traditional brokerages do not allow you to use margin to buy crypto, nor do they count crypto holdings as collateral for stock margin .

Practical Example: The $10,000 Deposit

Let's look at how buying power works in a real-world scenario provided by Investopedia :

The Deposit: You deposit $10,000 into a new margin account.
The Potential: Your total buying power is $20,000 (assuming 50% initial margin).
The Small Trade: You buy $5,000 worth of Stock A.
- Result: You have used $5,000 of your cash. You still have $5,000 in cash left. You have not borrowed any money yet, so you are not paying interest. Your remaining buying power is $15,000 ($5,000 cash x 2 + the $5,000 remaining "loan" capacity).
The Large Trade: You decide to buy $10,000 more of Stock B.
- Result: You use your remaining $5,000 in cash and borrow $5,000 from the broker.
The Total Position: You now own $15,000 worth of stock. You have $0 cash and a $5,000 margin loan. You will now begin paying interest on that $5,000 loan.