Margin buying power

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Topic Author
johnanglemen
Posts: 637
Joined: Thu Oct 01, 2009 1:00 pm

Margin buying power

Post by johnanglemen » Tue Apr 14, 2020 4:25 pm

I am going to dare to ask a margin-related question on this forum. I am not advocating anyone use margin. It is just a question for my knowledge :-)

Say you have $1M in VTI in an account, no margin debt, and margin requirements are 50%.

Because my required margin equity in these conditions is $500k, my broker says my stock buying power is also $500k. In other words, I can now buy up to $500k of VTI on margin.

However, as I understand it, that's not my "true" ultimate buying power.

After all, let's say I exercise that right in full.

Now my account balance is $1.5M, margin debt is -$500k, margin requirements still 50%.

Now my buying power isn't 0 -- it's $250,000.

And you can repeat this until the buying power indeed hits $0 (which will be when you've purchased $1M in stock on margin, ignoring all market fluctuations).

Here's the part that confuses me: Why can't I just buy the full additional $1M in stock all at once? Why must it be done in rounds like this? My broker can see what the result will be if I order it to purchase an additional $1M in VTI from the get-go.

I'm sure I'm missing something here.
Last edited by johnanglemen on Thu Apr 16, 2020 7:22 am, edited 2 times in total.

UsualLine
Posts: 12
Joined: Mon Dec 17, 2018 1:51 pm

Re: Margin buying power

Post by UsualLine » Wed Apr 15, 2020 3:55 pm

If you have $1M cash in an account with 50% margin requirement you could buy $2M of VTI.

https://www.investopedia.com/terms/i/initialmargin.asp

alex_686
Posts: 6322
Joined: Mon Feb 09, 2015 2:39 pm

Re: Margin buying power

Post by alex_686 » Wed Apr 15, 2020 4:00 pm

Nope. Used to work the margin desk. You have run out of SMA (Special Memorandum Account) Initial margin is set by the Fed, minimum equity is set the various exchanges, and most brokers have stricter rules.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

UsualLine
Posts: 12
Joined: Mon Dec 17, 2018 1:51 pm

Re: Margin buying power

Post by UsualLine » Wed Apr 15, 2020 4:36 pm

I was just giving the definition of 50% margin, which the OP said is the rule that applies to the account in question.

alex_686
Posts: 6322
Joined: Mon Feb 09, 2015 2:39 pm

Re: Margin buying power

Post by alex_686 » Wed Apr 15, 2020 6:28 pm

UsualLine wrote:
Wed Apr 15, 2020 4:36 pm
I was just giving the definition of 50% margin, which the OP said is the rule that applies to the account in question.
I need to apologize. I misread the OP.

This is what I think the OP is seeing.

He is seeing a cash available number, which is 50% of the account.

Purchasing power would be double that. After all, you only need to put down 50%.

There might be some weird kinks because of SMA, or if the securities have haircuts. Low price, low liquidity, etc.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

saver007
Posts: 166
Joined: Fri Nov 07, 2014 9:18 pm

Re: Margin buying power

Post by saver007 » Wed Apr 15, 2020 9:13 pm

I would say 2 million is your buying power for the initial day because of the 50% reg t margin reqirement. (Btw 4 million is the buying power for intra day - you can buy 4 million during day as long as you sold out 2M before 4pm due to 25% day trader margin).
You should be able to buy more on the following day because reg t 50% no longer an issue, rather typically 25% maintenance requirement apply. Although for new purchases, reg t initial applies again.I am not sure how the reg t is calculated for new purchases.
This is my understanding ...may not be accurate. Each brokerage has it's on rules.

If you really have 1 million, you may want to try out the portfolio margin. Your buying power for broad based index like VTI will be 6 million as portfolio margin has no 50% reg t margin reqirement. VTI margin reqirement is 15% or less.

Check out this IBKR page if you want to learn more. But this IB specific
https://www.interactivebrokers.com/en/index.php?f=24862

Topic Author
johnanglemen
Posts: 637
Joined: Thu Oct 01, 2009 1:00 pm

Re: Margin buying power

Post by johnanglemen » Thu Apr 16, 2020 7:18 am

I appreciate the responses here.

So, I am definitely looking at the stock buying power (not the cash withdrawal number).

And I agree with folks that $2M should be the buying power, and apparently ultimately *is* the buying power. (Or rather, to be clear, the buying power is $1M given that I already own $1M of VTI in the account; I presume that's what commenters here mean.)

But the behavior I'm seeing is that *today*, my buying power shows as $500k. Apparently the broker's math is "well, he has $1M in equity right now, and the 50% margin requirement means he needs to have at least $500k in equity, therefore he can buy at most $500k in stock."

I talked to a customer service agent and he told me that he does indeed expect that, as soon as I purchase $500k in stock, the buying power will update to say $250k (rather than $0) -- and so on and so forth until the account reaches $2M and the buying power does actually become $0.

Has anyone ever heard of a broker operating in this way, rather than making the full buying power available at once? I sort of see the logic, but it's a bizarre conceptual model to tell a customer "you can buy $X!"... then the customer buys $X... and then the broker responds "great, now you can buy $X/2!"

(By the way, I am already on Portfolio Margin; I just figured the numbers would be easier to work through for this post with Reg T / 50%.)

saver007
Posts: 166
Joined: Fri Nov 07, 2014 9:18 pm

Re: Margin buying power

Post by saver007 » Thu Apr 16, 2020 4:30 pm

It's normal for brokers to have stricter/ more conservative margin reqirements than what rules allow.
That being said, your broker is being very conservative especially if you have portfolio margin and you are buying a broad based index like VTI. If you look at OCC's portfolio margin calculator, VTI margin requirement is just a tad more than 8%.

Topic Author
johnanglemen
Posts: 637
Joined: Thu Oct 01, 2009 1:00 pm

Re: Margin buying power

Post by johnanglemen » Fri Apr 17, 2020 3:27 am

saver007 wrote:
Thu Apr 16, 2020 4:30 pm
It's normal for brokers to have stricter/ more conservative margin reqirements than what rules allow.
That being said, your broker is being very conservative especially if you have portfolio margin and you are buying a broad based index like VTI. If you look at OCC's portfolio margin calculator, VTI margin requirement is just a tad more than 8%.
But that's the thing... the requirements are not ultimately stricter. They just don't let you get there all in one go.

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