If you have a margin account investment, you’ll need to know your account's stock buying power before you purchase new stocks. Calculating your buying power involves determining the account's debit balance, credit balance, equity and margin requirements. The higher your stock buying power, the more new stock you can purchase.
About Stock Buying Power
When you invest in a margin account, a lender (usually your broker) loans you a certain amount of money to purchase stock, which serves as collateral for your loan. If the price of your stock increases above its purchase price, you can use the account to purchase more stock without selling your original investments. The amount of money you are able to spend on additional stock purchases is your stock buying power.
To calculate your buying power for a margin account, determine your equity and subtract the account's margin requirement multiplied by the account's current market value. To determine the account's equity, subtract the debit balance from the account's current market value. The debit balance is the amount of borrowed funds you still owe to the broker at the time of the calculation, and the margin requirement is the percentage of each new stock purchase that must come from your account.
Assume you have a margin account with a debit balance of $20,000, a current market value of $50,000 and a margin requirement of 50 percent. Your account equity is $30,000, which is calculated using the formula $50,000 - $20,000 = $30,000. The account's stock buying power is $5,000, which is calculated using the formula $30,000 - (0.5 x $50,000) = $5,000. In this case, you have $5,000 in buying power that you can use to purchase new stock.
You can usually purchase stock in excess of your margin account buying power if you borrow additional funds from your broker. For example, if your buying power is $10,000 and your broker imposes a margin requirement of 50 percent, you could purchase up to $20,000 worth of new stock. While you can use your stock buying power to make new purchases, you can't use it to reduce your debit balance.