What Is Non-Margin Buying Power in a Brokerage Account?
Learn what non-margin buying power means for your brokerage account. Understand your true cash available for trading and investing.
Buying power in a brokerage account refers to the total funds an investor has available to purchase securities. Non-margin buying power represents the cash an investor can use without relying on borrowed money from their brokerage firm. Understanding this distinction is important for managing financial resources and making informed trading decisions.
Understanding Non-Margin Buying Power
Non-margin buying power, often termed “cash buying power,” signifies the amount of settled cash an investor holds in their brokerage account immediately available for purchasing securities. It relies solely on the investor’s own funds, meaning no borrowing from the brokerage is involved. This provides a measure of an investor’s capacity to engage in transactions without incurring debt or leveraging their portfolio.
This concept directly impacts an investor’s ability to execute trades without unexpected limitations. Operating within non-margin buying power ensures an investor uses only funds they possess, mitigating risks associated with borrowed capital. It also helps maintain compliance with brokerage and regulatory rules, preventing potential account restrictions.
Calculating Non-Margin Buying Power
Non-margin buying power is calculated by starting with the total cash held in an investor’s account. From this, any pending purchases that have not yet settled are subtracted, as these funds are already committed to future transactions.
Conversely, proceeds from settled securities sales are added to the cash balance. If an investor has initiated any withdrawals, these amounts also reduce the non-margin buying power. The calculation emphasizes the importance of funds being “settled” to be considered available for new purchases, rather than simply being reflected as a balance after a trade.
Impact of Settlement Periods
Settlement periods determine when funds from a securities sale become available for new purchases, directly impacting non-margin buying power. A settlement period is the time it takes for a transaction to finalize, involving the transfer of securities to the buyer and funds to the seller. As of May 28, 2024, the standard settlement cycle for most stock and bond transactions in the United States is T+1, meaning settlement occurs one business day after the trade date.
For example, if an investor sells shares on a Monday, the transaction typically settles on Tuesday, assuming no market holidays. Until settlement is complete, proceeds from the sale are “unsettled funds” and generally not available for immediate reinvestment in a cash account. This delay means an investor cannot instantly use the cash from a sale to buy another security if operating solely on non-margin buying power.
A lack of understanding regarding settlement periods can lead to “good faith violations” in cash accounts. This occurs when an investor purchases a security with unsettled funds and then sells it before the initial purchase funds have settled. Accumulating multiple good faith violations, such as four within a 12-month period, can result in the brokerage account being restricted, allowing purchases only with fully settled funds for a period, often 90 days. This restriction limits an investor’s trading flexibility.
Non-Margin Versus Margin Buying Power
Non-margin buying power contrasts with margin buying power, which involves the ability to purchase securities using funds borrowed from a brokerage firm. Margin buying power introduces leverage, allowing investors to control a larger value of securities than their cash balance would otherwise permit.
The primary difference lies in the source of funds: non-margin buying power uses only the investor’s settled cash, while margin buying power combines the investor’s cash with borrowed funds. This distinction also impacts risk exposure; non-margin trading carries lower risk as there is no debt, interest payments, or potential for margin calls. Margin trading, conversely, involves higher risk due to debt obligations and the possibility of magnified losses.
These two types of buying power are typically associated with different account types. Non-margin buying power is characteristic of cash accounts, where all purchases must be paid in full with available funds. Margin buying power is available in margin accounts, which permit borrowing against eligible securities. Certain securities, such as penny stocks, some options, and leveraged exchange-traded funds (ETFs), are generally considered non-marginable and must always be purchased using non-margin buying power, even in a margin account.