Option Investor

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Buying Power

Buying power has many forms but the most basic definition refers to institutional sized accumulation or distribution over a long period. BOP tells you whether the underlying activity in a stock is characterized by systematic buying or selling. The single most definitive and valuable characteristic of this indicator (for a specific issue) is its pronounced ability to contradict the price movement; it can help you spot changes of character in a stock's trend.

A market-wide definition is somewhat different. It is generally understood as the amount of money available to buy securities; determined by the cash in brokerage accounts plus the money that would be available if securities were fully margined. The basic rule of buying power is the market cannot rise above the capital outstanding. The principle is that investors have only so much money available to purchase stocks. If it's being used in money market funds and cash, their buying power is readily available, not only to move into stocks but to push up prices. In contrast, if most investor buying power is already in equities, there's little left for purchasing more stock.