Series 14: Buying Power

Taken from our Series 14 Online Guide Buying Power

When an SMA is created, it increases the buying power of an account. Whatever the value of the SMA, the buying power is twice this amount, because the investor can purchase twice this value in securities.

Note: The buying power on a day trading account is four times the SMA, rather than two times the SMA, on a traditional margin account.

Example Question 1

Rodney opened a margin account last year. He bought 100 shares of XYZ at $50 per share on margin. The price of the shares increased to $60 per share and now has decreased to $55 per share. What is the current value of Rodney’s buying power?

Answer: $1,000. Initial purchase:

LMV – debit balance = equity

$5,000 – $2,500 = $2,500

Price increases to $60 per share:

LMV – debit balance = required equity + SMA

$6,000 – $2,500 = $3,000 + $500

Even though the share price has decreased from $60 per share to $55 per share, the SMA value remains at the highest value of excess equity. So the buying power would be $1,000.

Example Question 2

When you opened your margin account last month, you purchased securities worth $60,000. Their value quickly rose to $70,000. Your increased equity was put into a special memorandum account. Suddenly, your stock fell sharply and kept fal

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