The amount of money a day trader has access to is not limited to the amount of money in his brokerage account. Brokerages offer traders access to additional funds to increase the buying power that can be used to day trade.

Definition

Buying power is the dollar amount that a day trader has access to for the the purchase of securities. There are several components that make up buying power.

Cash

The cash in a day trader's account is the main component of buying power. The cash belongs to the day trader and it can be used to buy and sell securities.

Margin

Qualified day traders have access to margin funds. Margin funds are funds that a brokerage loans to a day trader for the purchase of securities. Brokerages typically offer two to four times the trader's account worth in margin funds. Brokerages use the trader's cash and securities as collateral for the margin funds.

Total Buying Power

The sum of the trader's cash and the the margin funds that a brokerage offers a day trader is the trader's buying power.

Warning

If the value of a trader's securities fall and the ratio of owned securities to margin funds borrowed decline below a level set by the brokerage then the brokerage will issue a margin call. If a trader gets a margin call, he must either deposit more cash into the account or sell securities to reduce the amount of margin funds borrowed.

Condideration

Brokerages charge interest when a trader uses margin funds. The trader must take the cost of the interest payments into account before using margin funds to trade.

Source:

SEC: Margin: Borrowing Money To Pay for Stocks