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Importance of the Overnight Buying Power for a Day Trader

For Day Traders who trade on margin through an online broker, Overnight Buying Power refers to the amount of money you have available to buy stocks and hold that positions overnight. In most cases, this amount is simply double the cash on hand.

Overnight Buying Power is calculated according to strict rules (established by the Securities Exchange Act of 1934) by dividing your account's Excess Equity by the Federal Reserve Board Regulation T Margin Requirement. The minimum Regulation T Margin Requirement today is 50% for both long and short positions. The excess equity is adding up of the followings.

» Cash Balance
» Long Market Value
» Credit Balance
» Short Market Value
» Margin Requirement (up to additional 100%)
» Margin Debit

As a rule Overnight Buying Power changes after market close. Traders who have positions that amount to more than twice the cash in their margin account must close positions prior to market close to comply with the Overnight Buying Power rules. As opposed to margin accounts, cash accounts do not have access to margin. In a cash account your Buying Power is usually equivalent to the settled funds. Settlement takes place according to the T+2 rule. However some online brokers also include unsettled funds in your buying power. This means that if you sell a stock, the proceeds from that sale will be immediately available - thus T+2 rule will not be applied - added to your Buying Power.

In compliance with the T+2 rule, most stock trades on the US Stock Exchanges take two days to settle, therefore your Buying Power can be larger than your settled funds for two days after a sale.

Because in Intraday Trading Overnight Buying Power plays a vital role pertaining to the ability to buy stocks in the extent allowed by the requirements to avoid margin call, all investors have to understand how to control the amount of money you can spend for stocks at any time. Buying Power is changing during market hours, and overnight hours.

In accordance with the rule defined in the first paragraph your Buying Power will increase as you liquidate your either long or short positions however, depending on your account type and the transactions involved, it could take several days (usually 2 days according to the T+2 rule) to have the amount increase in your buying power. In light of this Day Traders have to keep track of Buying Power on their margin account at all times, to figure out how much money they can deploy for trading.

Overnight Buying Power Is Also Referred To As Excess Equity

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All investors regardless of their time horizon, especially Day Traders should bear in mind, if a trader is trading with unsettled funds, it qualifies for violation that should be avoided by all means. Commonly incidental first-time violations are considered by the broker as 'good faith violation', in which a trader accidentally uses unsettled funds to buy another stock then exits the position before the original funds settle. However there is a wide array of violations not deemed as GFV which trigger different margin calls.

In margin accounts, traders have the ability to trade with leverage using margin from their broker, consequently Buying Power may be several times the amount of settled and unsettled cash in your account.

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Plenty of brokers offer 4x buying power also referred to as intraday margin, during market hours, and 2x buying power during extended hours referred to as overnight margin.

Day Traders need to put every wheel into motion to avoid margin calls (that is an online automated action versus phone calls from stock brokers as it was in practice in the past century), which can oblige you to close one or more positions prematurely. Margin calls are triggered when the value of a leveraged position falls, and your Buying Power dips below the limit. If you don't hold enough cash or marginable stocks in your account to cover your margin requirements, you'll receive a margin call.

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