What is Buying Power and how is it calculated?

Buying Power is the sum of your cash plus your margin account when there are no holdings in your portfolio. Here at WSS, a portfolio starts with $100,000 cash, plus a $100,000 margin account, which is simply a loan from WSS of $100,000 to purchase stocks, creating buying power for a total portfolio of $200,000.

The calculation for Buying Power becomes complex when we start purchasing stocks below $3 because these stocks are not marginable according to the rules of the game at WSS. This means that you cannot borrow 50% of their value from the broker for the purchase (in this case, WSS).

Also, short proceeds are not added to cash but are restricted and therefore selling short does not increase cash, and buying power will be reduced by the amount of the short position that needs to be covered at Market Value. This will cause buying power to change at virtually every interval that there is a price change in the market value of securities held or shorted.

Investors need to be aware that when buying on margin, the borrowed amount accrues interest at 8%. When an account's buying power is negative, which occurs when the value of your long positions fall, new trades will not be accepted until other positions are closed and buying power becomes positive.

The calculation for buying power is as follows:

Equity + Cash – Debit balance (borrowing) – 2*Margin requirements = Buying Power

Where:
Equity = Cash – Debit Balance+Credit balance+ MV of Long Positions – MV of Short Positions
Cash = Cash in Account
Debit balance = Borrowed Funds
Credit Balance = Interest earned and accrued Dividends and Distributions
Margin Value = The sum of all long positions above $3
Margin requirements = 50% of the value of stocks above $3
MV= Current Market Value

Example 1
A $100,000 WSS portfolio has buying power of $200,000 at the start.

Investor purchases 1000 shares of ABC for $10/share, for a total of $10,000. ABC shares are marginable,because they are above the $3 threshold. Therefore his new buying power will be:

$10,000+95,000 - (-95,000(borrowed from WSS)) – ( 2*(.5*10,000))= $190,000

Short proceeds are not added to cash but are restricted and therefore selling short does not increase cash, but is restricted until the position is covered.

Example 2
A $100,000 WSS portfolio has buying power of $200,000 at the start.

Investor purchases 1000 shares of ABC for $2/share, for a total of $2,000. ABC shares are not marginable,because they are below the $3 threshold. Therefore his new buying power will be:

$2000+98,000 -(-100,000) - (2*(1*2000))= $196,000

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