What exactly is buying power? As a small account trader, this is a number that I have to pay very close attention to, to make sure that I don’t have the potential of wiping out my entire account with one trade. The number basically is the maximum amount of money that I have to trade with, and is a pretty volatile number, depending on how my overall account is performing.
When we trade, we have Buying Power Reduction. This is a pretty complex number, as a lot of different variables go into determining it (product, trade type, account type, etc.)
In a standard margin account, there is a “2:1 leverage” when we deal with stock. That means that when we buy 2 shares of stock, the buying power is only reduced by half of that notional value, or 1 share of stock.
In an IRA account, stock and option buying are the same number (1:1) because the trades are in “cash value” or are in full. There is no leverage or borrowing.
Because of this, we prefer margin because it allows us to essentially double our profits, because of the nature of the 2:1 leverage.
Portfolio margin is even better, with a 6:1 leverage that bases the BPR requirement on the largest estimated loss of ALL your positions, and factors in volatility as well.
Portfolio margin has much more stringent requirements, necessitating $125,000 in margin and liquidity of $100,000 at ALL TIMES.
I’m going to be stuck in a margin account for a while. Luckily, anyone with about $3,000 can open up a margin account, and begin their trading journey.
Disclaimer: These views are not investment advice, and should not be interpreted as such. These views are my own, and do not represent my employer. Trading has risk. Big risk. Make sure that you can balance your risk/reward, and trade small, and trade often.
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