What is buying power?
When investors or traders talk about buying power, they're referring to the amount of money available to buy securities, like stocks or bonds. In simple terms, buying power includes the cash in your account plus any extra funds you can borrow through margin. This total determines how much you can invest at any given time.
Capitalise on volatility in share markets
Take a position on moving share prices. Never miss an opportunity.
Buying power is a key concept, especially for those using margin accounts. These accounts allow traders to borrow money based on their existing cash, increasing their buying power and potential for bigger investments. However, it's important to understand that using margin also involves risks, as borrowed money must eventually be paid back. Knowing your buying power can help you make smarter, more informed trading decisions.
How does buying power work & example?
Suppose you have $10,000 in your brokerage account, and you're allowed to borrow up to $10,000 more. Your total buying power would be $20,000.
For example, let's say you want to buy Tesla - TSLA stock. If Tesla's stock price is $1,000 per share, your $20,000 buying power allows you to buy up to 20 shares of Tesla. Without using margin, you could only buy 10 shares with your $10,000. However, using margin increases your potential profits but also your risks, as borrowed money needs to be paid back, and if the stock price drops, you could lose more than you initially invested.
Why buying power is important to traders
Buying power is important to traders because it determines how much they can invest in the market. It includes both the cash in their account and any extra funds they can borrow through a margin account. This extra borrowing capacity allows traders to buy more stocks or other securities than they could with just their own money.
For traders, having more buying power means they can take advantage of more opportunities. For example, if they spot a good deal on a stock, they can buy more shares than they could with just their cash. However, it's also important for traders to manage their buying power carefully, as borrowing money involves risks, like paying back loans and interest, especially if the value of their investments goes down.
Buying power of margin trading accounts
In margin trading accounts, buying power refers to the total amount of money you can use to buy stocks, which includes both your own cash and borrowed money. For example, with Skilling, a reputable CFD broker, you can leverage your money up to 10:1 on stocks. This means for every $1 you have, you can borrow $10, giving you much more buying power.
So, if you have $1,000 in your account, with a 10:1 leverage, you can control up to $10,000 worth of stock CFDs. This allows you to potentially earn bigger profits, as you can buy more shares than with just your own money. However, it's important to remember that this also increases the risk, as losses can exceed your initial investment if the stock price drops.
Summary
As you've learned, buying power is a crucial factor in trading, enabling you to maximize your investment potential by combining your own funds with borrowed money. However, it also carries risks, especially when using margin accounts.
Source: investopedia.com
Do you have a Skilling CFD trading account yet? With Skilling, you can access and trade 1200+ global financial instruments such as stocks, commodities, cryptos and many more with leverage options and reasonably low fees. Sign up for a free Skilling CFD trading account today.
