If the overview screen of your online brokerage account lists an available purchasing power figure, you can use that money to buy more stocks. In a brokerage margin account, the availability of margin loans allows you to buy more stock than you have cash or equity. Using the cash purchasing power means that you are actually borrowing money to pay for a portion of the stocks you buy.
Brokerage Margin Accounts
A stock brokerage margin account allows you to borrow -- in the form of a margin loan -- a portion of the cost of buying stocks or other marketable securities. Using margin increases your stock purchasing power and the profit potential from the equity that you have in your account. The amount of purchase power you have depends on your accounts equity -- the total value of the stocks and other investments held in the account minus any outstanding margin loan.
Purchase Power Limits
The Securities and Exchange Commission rules allow you to purchase stocks worth up to two times your equity in a regular margin account. This means you can borrow up to 50 percent of the cost of stocks. In an account designated as a pattern day trading account, the purchasing power is up to four times the account equity -- for day trading only. If your stock holdings go up in value, your equity will increase and so will your purchasing power. If your stocks go down, your purchasing power will also drop in proportion to the amount of margin loan leverage you are currently carrying.
Exceeding Your Purchase Power
You should avoid placing stock purchase orders that would cost more than the listed cash purchasing power. If you exceed your margin limits, your broker will issue a Regulation T or fed margin call to add more money to your account. If you do not quickly deposit the requested money in cash or securities, the broker will sell off some of your stocks and place trading restrictions on your account. If your account screen shows a certain level of purchasing power, you may not want to buy stocks right up to the maximum level.
Risks of Margin Investing
Buying enough stocks to use your full margin purchasing power puts you at two times leverage in a regular margin account. If your stocks go up by 10 percent, you will gain 20 percent on your invested equity. However, if the value declines by 10 percent, you will suffer a 20 percent loss. If the value of the equity in your account drops below 25 percent, the broker will require you to add more cash or sell some of your stocks. In a day trading account at your purchasing power limit, gains and losses are multiplied by a factor of four.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelors degree in mathematics from the U.S. Air Force Academy.