How is margin buying power calculated

[ \textbf{Remaining margin buying power}

\frac{\text{Account equity} - (\text{Initial margin requirement} \times \text{Current marginable positions})}{\text{Initial margin requirement}} ]

With the standard 50% initial margin requirement, the calculation is often expressed as:

[ \textbf{Buying power}

2 \times \text{Regulation T margin excess} ]

Your brokerage platform may show a different amount. Brokers can apply house requirements, security-specific rules, concentration limits and maintenance requirements.

Margin Buying Power at a Glance

The Basic 50% Margin Example

Assume you have:

• Account equity: $10,000
• No existing positions
• Initial margin requirement: 50%

The calculation is:

[ $10,000 \div 0.50 = $20,000 ]

Your total purchasing capacity is $20,000. You provide $10,000, and the broker lends approximately $10,000.

Regulation T generally allows a broker to lend up to 50% of the purchase price of an eligible margin security. Some securities and brokerage accounts have higher requirements.

How Existing Positions Reduce Buying Power

Now assume the account buys $12,000 of marginable stock.

First, calculate the margin excess:

[ \text{Margin excess}

$10,000 - ($12,000 \times 50%) ]

[ \text{Margin excess}

$10,000 - $6,000

$4,000 ]

Then calculate the remaining buying power:

[ \text{Remaining buying power}

$4,000 \div 0.50

$8,000 ]

The account has approximately $8,000 of additional Regulation T buying power, assuming there are no other positions, open orders, fees, interest charges or broker restrictions.

FINRA uses this same approach: calculate margin excess first, then multiply the excess by two to determine Regulation T buying power.

A Simpler Formula for a New Account

When you have no existing margin positions, use this formula:

[ \textbf{Total buying capacity}

\frac{\text{Account equity}}{\text{Initial margin requirement}} ]

The amount above your equity represents the margin loan. Margin loans accrue interest and must be repaid whether the investment gains or loses value.

Why Your Broker's Number May Not Equal Two Times Your Equity

The common 2x rule applies to a basic Regulation T example. Your broker may use a different calculation because of:

• The security's initial or maintenance requirement
• House margin requirements
• Existing margin loans
• Non-marginable securities
• Concentrated positions
• Options, short positions or leveraged exchange-traded products
• Open orders and unsettled transactions
• Cash withdrawals and accrued interest

Fidelity, for example, says its displayed margin buying power can use a lowest possible house requirement that is often 30%. Concentrated or partially marginable positions may require more equity. Fidelity also separates margin buying power from cash available for trading without creating a margin loan.

For a specific trade, the buying power shown in your brokerage account is more useful than a generic online formula.

Margin Buying Power Versus Maintenance Margin

Initial margin determines how much equity you need to open a position. Maintenance margin determines how much equity must remain after the position is open.

Account equity is generally calculated as:

[ \textbf{Account equity}

\text{Current market value of securities}

\text{Margin loan} ]

If the market value of your securities falls, your account equity falls while the margin loan usually stays the same.

FINRA rules require at least 25% maintenance equity for many long margin positions. Brokers often impose higher requirements, such as 30% to 40% or more, depending on the security and account.

Maintenance Margin Example

You buy $20,000 of stock using:

• $10,000 of your own equity
• $10,000 borrowed from the broker

If the stock falls to $14,000, your account equity becomes:

[ \text{Account equity}

$14,000 - $10,000

$4,000 ]

At a 25% maintenance requirement, the account must have:

[ $14,000 \times 25% = $3,500 ]

The account still meets that requirement. At a 40% house requirement, it would need:

[ $14,000 \times 40% = $5,600 ]

That could create a margin deficiency even though the account remains above the regulatory 25% minimum.

Margin Buying Power Is Not Cash Buying Power

These balances refer to different amounts:

• Cash buying power: The amount you can use without borrowing.
• Margin buying power: The amount you can use by combining available equity with a margin loan.
• Non-margin buying power: The amount available for securities that require full payment.
• Day-trading buying power: A separate balance that may use maintenance excess and special day-trading rules.

Using margin can create interest charges and expose the account to margin calls. A broker may also liquidate securities without waiting for your permission if the account falls below its maintenance or house requirements.

The Practical Calculation

For a specific trade:

1. Find your current account equity.
2. Identify the security's initial margin requirement.
3. Calculate the margin requirement for your existing positions.
4. Subtract that requirement from your account equity.
5. Divide the remaining margin excess by the requirement for the proposed purchase.
6. Check your broker's margin calculator for security-specific restrictions.

For a basic 50% example:

[ \textbf{Additional buying power}

\frac{\text{Equity} - (50% \times \text{Existing margin positions})}{50%} ]

The amount shown by your brokerage account may be lower because your broker can impose stricter house requirements than the regulatory minimum. Check the trade-specific calculation before placing an order, especially for volatile, concentrated, leveraged or non-marginable securities.