Consumer buying power is disposable, after-tax income, a sum of money you are able to spend, save or invest. Because buying power increases as net income rises, pre-tax deductions such as insurance or contributions to an employer-sponsored retirement plan not only decrease taxable income, but also increase consumer buying power. The U.S. Bureau of Economic Analysis reports that as of May 2013, disposable personal income -- consumer buying power -- is on the rise.
Buying Power vs. Purchasing Power
Although buying power is the total sum of money you have to spend, save or invest, purchasing power determines how far those dollars will go. Purchasing power has a direct relationship to price fluctuations and the rate of inflation. When net income increases during a period of inflation, your buying power will always increase, but depending on the rate of inflation and how much prices increase your purchasing power may fall. If your net income rises faster than prices increase, however, both buying power and purchasing power will rise.
Margin Buying Power
Margin buying power is another facet of consumer buying power. Margin buying power refers to buying on margin, or borrowing to purchase securities. Margin is a percentage of the amount of cash equity in a margin account that an investor can borrow against and use to purchase marginable securities. If, for example, you have a balance of $10,000 in a margin account and wish to purchase marginable stock that has a 50 percent initial margin requirement, your margin buying power is $10,000 divided by .50, or $20,000.
Buying Power Perceptions
How you perceive your level of buying power is as important as how much buying power net income actually provides. Feeling confident about your personal financial situation and the direction in which the economy is moving increases confidence in your ability to buy. Perceptions about buying power are reflected in the Consumer Confidence Index, an economic indicator that measures how consumers feel about their personal financial situation and the state of the economy as a whole. As of June 2013, The Conference Board reports that consumer confidence is trending upward, rising 7.1 points since the May 2013 report.
Effect on Equity Investments
Risk tolerance thresholds in combination with buying power perceptions can influence whether and how much equity investors invest. Increasing interest rates as a result of inflation also increase the required rate of return on stocks. Regardless of the buying power equity investors have, they may invest less or not at all until stock prices start to come down. Deflation can also have an effect as it decreases future dividends and resulting income streams, causing some investors to feel unsure about whether or not to invest.
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