Buying Power – Overnight & Day Trading
What is Buying Power
Buying power is the money extended by the brokerage firm to a trader for the purpose of buying and selling short securities. An account must be approved for margin trading in order to have a buying power that is beyond the cash on hand in the account. There are two primary types of buying power: (1) overnight and (2) day trading.
Overnight Buying Power
Overnight buying power is the amount of money a trader can have in positions which are held overnight. In the majority of cases, this amount is simply double the cash on hand. So, if a trader has a $50,000 account, the trader will have $100,000 worth of overnight buying power. This buying leverage will change depending on the stock on the stock held. For example, as stocks become extremely volatile, brokerage firms will have a list of stocks which have specific margin requirements, they may require more than a 2 to 1 ratio for overnight positions.
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Day Trading Buying Power
Day trading buying power is the amount of money extended to a trader to perform active trading throughout the trading day. In order to qualify for day trading buying power in the United States, the trader must have a minimum account balance of $25,000. If a trader is able to meet this cash requirement he or she will have 4 to 1 buying power. This means if the trader has a $50,000 cash account, the trader will be able to buy or sell short $200,000 worth of stock during the trading day.
Other Forms of Buying Power
Thus far we have discussed the buying power for the equities market. Now, the buying power for the forex and futures market is far greater. Traders can trade 100 to 1 in the forex market. This sounds great, but it can bring about financial ruin if not managed properly.