KEY TIPS

Brokerage accounts have three types of value: account value, cash value, and purchasing power.

The account value is the total dollar value of all holdings in the account.

Cash value is the total amount of liquid cash in the account, available for immediate withdrawal or use.

Purchasing power is the amount an investor has to buy securities, consisting of cash, account equity, and available margin (money that can be borrowed).

In a margin account, the investor's total purchasing power rises and falls with fluctuations in the value of his assets.



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Account value

Account value, also known as total equity, is the total dollar value of all holdings in the trading account; not just securities, but also cash. This figure is calculated by adding the total amount of cash in the account and the current market value of all the securities and then subtracting the market value of the stocks that are short. It is essentially the value of all positions if they were to be liquidated at a particular time.

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Cash value

Cash value, also known as cash balance value, is the total amount of real money (the most liquid of funds) in the account. This figure is the amount that is available for immediate withdrawal or the total amount available to purchase securities in a cash account.

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Purchasing power

The final figure, purchasing power or purchasing power, is the total amount available for the investor to buy securities. This amount overlaps the cash value to some extent, but goes further. Includes both available cash and any available margin.



The purchasing power of an investor depends on the amount of equity in the account, which is the total value of the stocks and other investments held in the account less any outstanding margin loans. Purchasing power, or purchasing power, also depends on the type of account the investor has. If the investor has a margin account, his purchasing power will almost always be greater than the cash value.

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Purchasing power and margin accounts

Margin is borrowed money, specifically money borrowed from a brokerage firm that is used to buy stocks or investments. It is the difference between the total value of the securities held in the investor's account and the broker's loan amount. If an investor buys on margin, he is using the borrowed money to buy securities.



Securities brokerage margin accounts provide loans to investors so they can purchase securities or a larger quantity of securities. The loans are called margin loans and they increase the investor's purchasing power of stocks along with the potential for higher profits or losses on those investments.



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Purchasing power limits

The Securities and Exchange Commission (SEC) limits the value of the shares that an investor can buy on margin. That limit is twice the capital in the margin account. Basically, the investor can borrow 50% of the cost of the shares.1 If the account is a pattern daily trading account, which refers to traders or investors who execute four or more daily transactions for five business days, the limit increases the capital in the margin account to four times, but only for daily transactions.2



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The risks of buying on margin

As the shares in a margin account increase in value, so does the purchasing power of the account and the investor. If stocks go down in value, so will purchasing power. If an investor uses all of their margin purchasing power to buy stocks, they will have double the leverage in a margin account. Therefore, if an investor's shares go up 10%, the investor earns 20% on her capital. A 10% decrease will mean a 20% loss. For day traders, purchasing power gains and losses are multiplied by four.

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