If you are looking forward to investing in stock markets, then you must have an understanding of the key terminologies used, both in common and technical parlance. Alongside, you should have a robust understanding of the market fundamentals. Remember, stock market investments can be a high-risk option, being subject to market volatility. While starting your investment journey in stock markets, you must have come across the common term: buying power. Wondering what does stock buying power mean? Read on to know more.
What is buying power?
Buying power is the total amount of money that an investor can use to buy stocks and securities. It will also include the amount available to invest in stocks through the Margin Trading Facility (MTF). Thus, buying power is the total amount available for investment in your bank account as well the MTF account. Here, it is important to understand that to avail the Margin Trading Facility, you need to have a margin trading account with your broking firm. This is in addition to having a compulsory Demat account and trading account.
What does buying power mean in context of margin trading accounts?
Once you have a margin account with your broking firm, it will allow you an increased buying power. This is because you can leverage your position in all securities, except for future contracts or options. For example, if you want to purchase stocks of X company, but don’t have sufficient cash in your bank account, you can use the margin trading account to make the required purchase. Both cash or a collateral via your existing stocks and securities can be used to create positions against the margin. Broking firms will specify the maximum number of days for the position to be held. Typically, the formula: N+T is followed. Here, N represents the number of days allowed for carrying over the position and T stands for trading days. N varies from one broker to another and is contingent upon the variables, like the broking firm’s risk taking benchmarks and the type of customer. Remember, brokers also specify the minimum amount required to be paid while opening your margin trading account. This minimum amount has to be maintained compulsorily at all times. If you don’t have the minimum balance in your account, your position will be automatically squared-off at the end of a day’s trading session.
What does buying power mean in context of non-margin trade accounts?
Buying power meaning, with respect to a non-margin trading account, or an ordinary trading account is simply equal to the total amount of money you have in your bank account. For instance, if you have Rs 50 lakh in your bank account, then your buying power is the exact Rs 50 lakh. Here, it is important to note that any purchase or sale order for stocks and securities is made through your trading account, and subsequently reflected in your Demat account. Both accounts are linked with your bank account. So for any purchase or sale order, your bank account will be accordingly debited or credited.
How to increase your buying power?
You can increase your buying power by opting for the Margin Trading Facility. This facility can be viable for investors looking for short-term trading options through intraday trading. If you don’t have enough finances for intraday trading, then you can opt this facility to enhance your buying power. But if you have a long-term investment horizon, then the MTF will have little or minimal impact on your buying power. Instead you should focus on the right investments in stocks and securities, keeping in mind your risk appetite and overall long-term financial objectives.
Will SEBI’s new rules for stock trading affect your buying power?
Market regulator, Securities Exchange Board of India (SEBI) has issued a new set of rules regarding stock trading. These will be implemented in a phased manner from September 1, 2020 to December 1, 2020. As per the new rules, if you have made a purchase order, 20% of the transaction amount will be debited from your bank account on the same day. This will significantly impact a trader who has availed the margin trading facility. While earlier, there was no restriction for the amount of leverage on margin requirement, now it is compulsory for all broking firms to collect 20% of the transaction’s value beforehand. Alongside, SEBI has issued a new rule that trading profit from intraday trading will be reflected in your account after two working days. Thus, the new rules will have a considerable impact on the buying power of investors.
After knowing what is buying power, you must endeavour to make wise investment decisions. If you have availed the MTF to enhance your buying power, do remember to borrow a lesser amount for a shorter time-period. Alongside, always choose a reliable and trusted financial partner. You must look for features like technology enabled Demat and trading accounts, flexible brokerage charges, simplified trading platforms and expert market advisory.