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Buying Power and Excess Margin
Buying power is the amount of excess margin you have available in your account. With a 50% margin requirement, simple mathematics says that any given amount of buying power (excess equity) can buy twice that amount in additional securities.
Let's use the Disney example again where the stock has just increased in price by $20 per share. Your margin account would look like this:
As you recall from our hypothetical example, when you originally purchased the stock, the equity in your margin account was $2400, so you now have an unrealized, or paper profit, in your account of $2,000. You could realize that profit immediately by selling your Disney shares, repaying your Eagle Traders loan, and withdrawing the $2,000 in cash, minus interest charges of course.
But you may not want to close out your Disney position. Perhaps you think the shares will go even higher. Meanwhile, though, you really would like to somehow take advantage of the paper profit you already have.
And there is a way to do that in a margin account. You can't take advantage of all the profit, but you can use part of it. That's the part known as Excess Equity and here's how it's calculated:
Take the current market value of your stock position and calculate how much of your own money you would have to put down if you were buying the stock at this current market value. In our case, and given the 30% initial margin requirement, that amount would be $3,000 (30% * $10,000).
Now subtract that initial margin requirement from the equity now in your account. You will find that you have a surplus of $1400 in equity and it is this surplus that is known as Excess Equity (EE).
Put another way, the formula for determining excess equity goes like this:
EE = Equity - (stock's current market value x initial margin requirement)
To repeat, with the current 50% margin requirement, your buying power in the example above is equal to twice the amount of your excess equity or in this case, $2800.
Please note that you have to check the buying power in your account daily, because buying power fluctuates with the market price of the stock.
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