How do I calculate buying power?

March 22, 2006 3:36 PM

How is buying power calculated, specifically in my stock account?

I've been trying, on and off, to wrap my head around how they calculate the buying power in my account. I have four accounts -- a long and short USD account and a long and short CAD account.

Based on the really terse replies I've gotten from my broker, they calculate the buying power by using the loan value of the marginable stocks, plus/minus my trade cash minus any open buy orders. According to them, the value of the stocks and the trade cash are taken, for the BP calculation, from looking at all margin accounts and converting the USD to CAD. I've done a basic calculation based on this, and it sort of seems to work.

However, I've seen other information from them that indicates that buying power is 2 x Excess Equity, where
Excess Equity = Equity - (stock's current market value x initial margin requirement). I'm not sure how this relates to the other explanation they gave. I see mention of 2 x equity = buying power in various web searches, which also refer to SMA and house excess, but I haven't seen a very clear explanation online.

posted by Big Fat Tycoon to Work & Money (4 answers total)

Usually it's cash plus the loan value of the marginable stocks (your third paragraph). I've not seen what you describe in your last paragraph. Of course, they can set whatever buying power formula they want, provided that it's within the NASD guidelines. I'm sure you also know that the initial and maintenance percentages can and do change pretty often for certain stocks.
posted by lackutrol at 3:47 PM on March 22, 2006

I would guess that the last paragraph is outdated information. Before the bubble burst, many brokerages allowed you to fully marginalize your account - $100 in stock = $200 buying power. Many people couldn't cover their calls, so they began limitingd this (there may even be a law now). Now you have different values based on what type of holding it is - stock vs. mutual fund, tech vs. blue chip, etc.
posted by blackkar at 7:59 AM on March 23, 2006

It's really hard to say what the calculation is without more information.

They could be doing two calculations - one is your maintenance excess x 2 and then using your SMA to calculate it (SMA is accrued through the life of the account, based on excess equity [equity above Reg T requirements, or 50%), plus any credits or debits and minus any Fed calls) and giving you the BP of whichever calculation is lower.

SMA is not an easy thing to calculate on an account, unless it's been open for two days or so, so that might explain the terse response from your broker. A lot of brokers might not quite understand the way it works themselves.
posted by mckenney at 10:50 AM on March 23, 2006

Blackkar, there's definitely an NASD requirement, which amounts to a law for nearly all brokerages. You have to have $2000 in cash in your margin account and I think you can use up to 50% of the value of marginable stocks. Of course, the brokerage may well have more stringent requirements.
posted by lackutrol at 5:32 PM on March 23, 2006