Calculating buying power, continued....
Your buying power is also affected by your Firm Maintenance Excess, or FME. Compared to calculating SMA, this is easy!
The concept is that you can use your buying power to buy more stock, unless doing so would throw you into a maintenance call. This is why FME is in the calculation.
The brokerage firm has house maintenance requirements, or Firm maintenance requirements. For example, 30% on common stocks. If your equity exceeds this requirement, you have Firm Maintenance Excess.
For example,
$100,000 long market value in common stocks
- $50,000 debit
______________
$ 50,000 equity
Remember that SMA cannot be calculated based on these numbers, since it depends on historical activity such as stock appreciation. In fact, if this were the initial status of your account, your SMA would be zero because you have no Reg T Excess. But let's say that in this example, your SMA happens to be $10,000 from past appreciation.
The firm's maintenance requirement would be $30,000. Therefore, you have FME of $20,000.
Here's a rule of thumb that will get you close to the actual buying power (assuming 30% house maintenance requirement): your buying power is twice your SMA or three times your FME, whichever is less.
So 3X FME would be $60,000
and 2X SMA would be $20,000
therefore, you have buying power of $20,000.
Here's how your account looks after you buy $20,000 in stock:
$120,000 long market value
- $70,000 debit
_______________
$ 50,000 equity
$40,000 Firm Maintenance Requirement
$10,000 FME
$0 SMA (you've spent it) |
