Buying Power
The more buying power, the better (if you're the buyer), as this is the amount of actual cash an investor has to invest in the stock market.
An investor can also take out a loan based on the amount of cash in their brokerage account, called a margin account. This is not a dollar for dollar loan, as depending on the brokerage house and the track record of the investor, he can usually borrow at least twice the amount of cash on hand in order to buy put or call options, for example. High rollers can get even more. But obviously, the more you borrow, the more you need to pay back...and if you make a bad investment decision, you could find yourself in a hole. Hopefully not one six feet underground.
A non-margin account only lets you use the amount of cash you have in your account. That is, your buying power is just...the assets you have.
Example: You have $200,000 in your Schwab account. You have a 50 percent margin limit in there, so you can buy up to $300,000 worth of securities. And if they go down, say, $20,000, then you have to sell $10,000 worth of securities to meet your max 50 percent margin limit. Were this a non-marginable account, you'd only have $200,000 worth of buying power.
Related or Semi-related Video
Finance: What is Purchasing Power?5 Views
finance a la Shmoop what is purchasing power well it basically refers to how
far a dollar goes in buying stuff that you you know care about you just got
your paycheck for the week netting you three hundred forty two dollars after [paycheck document]
blue state taxes today that can buy a few pairs of really nice shoes or a [supermarket checkout]
romantic candlelit dinner with wine in Manhattan or a gluten-free bread maker [romantic dinner table with wine]
from the fine people at williams-sonoma yeah you know you can advertise on us so
don't be shy there now hop in our Wayback Machine
let's visit what this $342 of modern america purchasing power could have
bought you in 1792 well here's a house listed right off the Potomac for three [shack for sale]
hundred forty two dollars that would work big pool there in the back well
could have bought you these six thousand acres of land in Pennsylvania or it [beautiful landscape]
could have bought you this jet if well you know if Jets had been invented yet
okay modern era time let's check out Chad the poorest country on the planet
it looks a lot like America in 1792 as far as purchasing power goes that same
romantic candlelit dinner that was three hundred forty two dollars in Manhattan [romanic dinner for $342]
well here it is for three dollars and forty two cents okay the basic idea here [roast pig for $3.42]
is that a dollar is not a dollar everywhere throughout history and
throughout the world inflation affects the purchasing power
of a dollar over time local wealth of a given area is also a big influence well
the demand for dollars versus a country's local currency is another
factor like when the Soviet Union fell under Gorbachev and Reagan they prized
hard currencies like the US dollar massively over their own country's ruble [one dollar bill in sky]
which kind of evaporated in value yes re there reppu Tanja's keeping it real and [russian money and Putin]
purchasing power metrics are a big thing mainly as they relate to old people who
can't really earn money on their own or at least not enough to fully pay their [coins falling down]
bills and when inflation roars while old people suffer more than other categories [lady walking down street and meets lion]
of citizen because their portfolios are usually invested in pretty safe low
interest bond that don't adjust to inflation and whose
value is destroyed in times of high inflation as their purchasing power kind
of erodes so yeah I don't be old if you can help it really makes it tough to
afford that gluten-free bread maker but you could see an advertisement for right [frazzled lady]
here rev William Sonoma would just get off their butts and write us a check
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