I’ve been doing a little research on margin trading, because I’ve recently been using it to float purchases of stock while my sale of some mutual funds clear. So I had a bunch of questions, like “What’s buying power?” and “How much do I need to keep in my brokerage account?” Well, I was once again helped by a terrific tutorial on Margin Trading at Investopedia which answered most of my questions.
I hope you’ll head over there and read it, but let me address some potential questions for you here in case you don’t have time to check it out. (I’ll assume for brevity that you understand what margin trading is)
Buying Power is the amount of money you can currently use to purchase marginable securities. It can be simply calculated as
(Cash + Security Collateral) * 2 – Marginable Securities
— or in many cases —
Cash * 2 + Security Collateral
Security Collateral is basically any marginable security such as stocks and mutual funds. Note that it appears that Buying Power is based on the value of your security collateral before the trading day begins.
Margin is like an Overdraft Account on your checking account — at least at TD Ameritrade and according to the Investopedia article. You can’t say “I want that one stock on margin” unless you only have one security in your account. Otherwise, you can just keep buying any security until your Buying Power reaches $0.
Maintenance Margin is Cumulative. When you have a margin account there is a minimum value that you must maintain at all times. This is called the Maintenance Margin. It’s calculated by adding up all the maintenance requirements for each security in your portfolio and if your account drops below the minimum value, then you’ll have to add more cash or securities to your account.
Maintenance requirements on individual securities can change based on price or volitility and can vary from broker to broker, so it’s best to check the rules on maintenance requirements on your account.