If you’re new to investing in Robinhood, then you may be unaware of the functions of Robinhood as a brokerage firm. Robinhood is a platform that allows investors or potential investors like you to put your money to work by investing in the top stocks, options, ETFs, and cryptocurrencies in the financial market. For starters, it’s important to understand the terms related to your purchasing on the platform hence why we’re looking to uncover the term “Buying Power”.
Buying power on Robinhood is the amount of money you can use to perform a trading action. If you’re trading stocks or options, your buying power is the funds held in your Robinhood Financial account. If you’re trading crypto, your buying power is the funds held in your Robinhood Crypto account.
In this article, I’ll explain to you what exactly the buying power on Robinhood means, how it works, and how it affects the money and your account, and your trades.
What Is Buying Power On Robinhood?
Buying power, otherwise known as excess equity, is the money you have as an investor that’s available to buy securities in a trading context. Buying power can be said to be equal to the total cash held in your brokerage account plus all available margin.
To help you understand this better, Buying power simply is the money you have available in your brokerage account that can be used to purchase any securities on your brokerage platform. When calculating your buying power, your brokerage firm calculates it as equals the total cash held in the brokerage account plus your available margin. Your buying power can take a different meaning depending on the context in which it is used, the industry in which it is used, or the brokerage firm you’re using.
Buying power in Robinhood isn’t as much different from the general definition of buying power. Buying power on Robinhood is the amount of money you have available to be used to purchase stocks, options, or cryptocurrencies. This means if you’re trading stocks and options on Robinhood, your buying power is the amount of money available to be used to purchase any stocks or options in your Robinhood financial account and if you’re trading cryptocurrencies instead, your buying power will be the amount of money available to be used to purchase any cryptocurrency in your Robinhood Crypto account.
Robinhood helps you easily determine your buying power as the platform calculates it for you as the total cash held in your brokerage account plus all your available margin. You can view all of your available buying power in one place on the platform’s mobile application or on Robinhood’s website.
How To View Your Available Buying Power In Your Mobile Application
Step 1: Log In To Your Mobile Application
Launch your Robinhood mobile application on your iPhone or Android device to access your account.
Step 2: Tap The Account Icon
You can find the account icon in the upper left corner of your screen. Once you tap the account icon, you will be able to view your buying power here.
For a comprehensive overview of your account details and your buying power, you can click on “Account”.
How Buying Power Works On Robinhood
While buying power can mean an entirely different concept depending on the context, industry, or brokerage firm using the term, buying power refers to the amount of money available for users to purchase securities in a leveraged account. The leveraged account is referred to as a margin account because traders or investors will take loans out of the account based on the amount of cash held in their brokerage account.
The federal reserve board established a “Regulation T”, as the regulation is aimed to mandate that an investor’s initial margin requirement in this account type must be at least 50% meaning the trader or investor has 2x buying power. So as an investor or trader, according to this regulation, you have a 2x buying power on your margin account whenever you open a margin account and get it funded, by any brokerage firm including Robinhood.
Buying Power of Margin Accounts
Depending on the brokerage firm, the amount of margin offered to a particular customer highly depends on the firm’s risk parameters and the customer. Usually, an equity margin account will offer investors twice as much as the cash held in their accounts due to Regulation T as discussed above, although some forex brokerage margin accounts offer up to 100:1 buying power.
The more leverage offered by a brokerage firm to an investor, the harder it is to recover from a margin call. This means that leverage allows the investor an opportunity to make more gains with the use of a higher buying power while also increasing the risk of having to cover the loan and possibly losing your investment if the trade doesn’t go your way.
If you are using a non-margin account, or a cash account, your buying power is equal to the amount of cash in the account. For example, if your non-margin account has $10,000 in it, your buying power is $10,000.
Buying Power Of Day Trading Accounts
Day trading accounts work differently from regular margin accounts on Robinhood or any other brokerage firm. To open a Day trading account, you’re required to own minimum equity of around $25,000. In a margin account, an investor usually has finance of 50% of their stock positions while the other 50% is provided by the brokerage firm which provides 2x equity in buying power but when it comes to day trading accounts, this isn’t the same. With day trading accounts, investors only have to fund 25% of the cost of securities purchased thereby giving the investor a 4x equity buying power.
For instance, if you have a $50,000 in a day trading account, you can purchase up to $200,000 worth of open trades within a trading day. Hence your buying power will be 50,000 x 4 which is $200,000.
How To Determine Your Buying Power On Robinhood
Although Robinhood automatically helps you calculate your buying power and lets you access the value in your account, it’s important to know the mathematics used to determine your buying power so you can understand the concept better.
Let’s assume you have $100,000 in your Robinhood margin account and you want to purchase shares in Tesla. Your initial margin requirement to enter a trade is 50% as this is in accordance with Regulation T discussed above. But on Robinhood and some other brokers, the initial margin requirement is usually between 50-100% depending on the brokerage firm.
To calculate your total buying power, divide the amount of cash in your Robinhood account by the initial margin percentage (let’s assume 50%). Here, we’ll divide your cash balance of $100,000 by 50% and as a result, you will be able to purchase up to $200,000 worth of Tesla shares ($100,000 / 50% = $200,000).
It’s important to know that the value of the margin account changes with the value of the securities you’re holding, the closer the price gets to your margin limit, the greater chance you will be receiving a margin call.
A margin call occurs when the value of your margin account falls below the amount required by Robinhood (or any other broker). Your margin account contains securities or shares you bought with a combination of your money and money borrowed from your broker via your margin account. The call specifically refers to Robinhood demanding that you deposit more money into your account so that your margin account is brought up to the minimum value.
How Much Buying Power Will Robinhood Give You?
The buying power you get is dependent on the type of account you own on Robinhood. If you’re using a Robinhood Gold account, you get up to 2x buying power. This 2x buying power is the money that will be lent to you by Robinhood to buy stocks with no interest.
Why can’t I Use All Of My Buying Power To Buy A Security?
To purchase securities on Robinhood, the initial requirement of a security is the minimum amount you need to have to complete the trade before investing on margin, and it ranges from between 50-100% depending on which security you’re purchasing. When you’re trading on margin, your available buying power will be the maximum amount you’re able to spend on a fully marginable security.
If you’re trading individual security that has an initial requirement that’s higher than 50% which is the minimum initial requirement per regulations, your available buying power for that security will be different from your full buying power as it will be updated to reflect the security’s specific initial requirement when you go through the process to execute a trade.
There are specific requirement ratios for a given security. To access this, navigate to the margin requirement section of the security’s detail page.