Brokerage account value, cash value and buying power
Online brokers and brokerage firms are very popular these days as they offer secure interfaces that allow quick analysis of trades, trends and forecasts, as well as the ability to borrow funds or trade on margin .
Online stock accounts use specific terminology and display common numbers that might be confusing to a novice trader. Three of the most common terms and numbers that every newcomer should know are account value, cash value, and buying power.
Key points to remember
- Brokerage accounts have three types of value: account value, cash value, and buying power.
- Account value is the total dollar value of all holdings in the account.
- The cash value is the total amount of cash in the account, available for immediate withdrawal or use.
- Purchasing power is the amount an investor has to buy securities, made up of cash, equity and available margin (money they can borrow).
- In a margin account, the investor’s total purchasing power rises and falls with fluctuations in the value of their assets.
Account value, also known as total capital, is the total dollar value of all holdings in the trading account; not only titles, but also money. This figure is calculated by adding the total amount of cash in the account and the current market value of all securities, then subtracting the market value of all stocks that are sold short.
Account value is essentially the value of all positions if they were to be liquidated at some point.
Cash value, also known as cash balance value, is the total amount of real money – the most liquid of funds – in the account. This figure is the amount available for immediate withdrawal or the total amount available to purchase securities in a cash account.
The final figure, the purchasing power or purchasing power, is the total amount the investor has available to buy securities. This amount overlaps the cash value to some extent, but it goes further. It includes both available cash and any available margin.
An investor’s buying power depends on the amount of equity in the account, which is the total value of stocks and other investments held in the account minus any outstanding margin loans. Buying power, or purchasing power, also depends on the type of account the investor has. If the investor has a margin account, their buying power will almost always exceed the cash value.
Purchasing power and margin accounts
Margin is borrowed money, specifically money borrowed from a brokerage firm used to buy stocks or investments. It is the difference between the total value of the securities held in the investor’s account and the amount of the broker’s loan. If an investor buys on margin, they use the borrowed money to buy securities.
Securities brokerage margin accounts provide loans to investors so they can buy securities or more securities. The loans are called margin loans and they increase the investor’s purchasing power of stocks as well as the possibility of making larger profits or losses on those investments.
Purchasing power limits
The Securities and Exchange Commission (SEC) limits the value of stocks an investor can buy on margin. This limit is twice the net value of the margin account. Basically, the investor can borrow 50% of the cost of the shares.
If the account is a model day trading account, which refers to traders or investors who execute four or more daily trades over five business days, the limit increases to four times the net worth of the margin account, but only for the daily trading.
The risks of buying on margin
As the shares in a margin account increase in value, the buying power of the account and the investor also increases. If the value of the shares goes down, the purchasing power will also go down. If an investor uses all of their margin buying power to buy stocks, their leverage will be doubled in a margin account.
So, if an investor’s stock goes up 10%, the investor earns 20% of their equity. A 10% drop will mean a 20% loss. For day traders, the gains and losses in purchasing power are multiplied by four.
Investopedia does not provide tax, investment or financial advice and services. The information is presented without taking into account the investment objectives, risk tolerance or financial situation of any specific investor and may not be suitable for all investors. Investing involves risk, including possible loss of principal.