Settled Cash or Buying Power: Which Denominator Sizes a Position

Your rule needs one denominator, and the workable choice is total account equity: the market value of your positions plus cash, minus any margin debit, measured at a stated time. Settled cash and buying power both belong in the process, but neither belongs in the denominator. Settled cash answers a different question, which is whether you can pay for the purchase right now. Buying power answers a third question, which is how much the firm will currently lend against what you hold.

Written as one sentence, the rule reads something like this: no single holding may exceed a stated percentage of total account equity as of the prior business day’s close, and no purchase may be entered unless it can be funded under the account’s own payment rules. The first clause bounds concentration. The second clause bounds mechanics. Collapsing them into a single number is what makes these limits drift.

The reason to separate them is that the two figures move for unrelated reasons. Equity moves with the market and with your contributions. Settled cash moves with deposits, dividends, and the settlement of your own sales. If the sizing limit is pinned to cash, then a large deposit on a Tuesday can authorize a position that your written concentration policy would never have allowed on Monday.

A cap expressed as a percentage of buying power is a cap that grows when you can borrow more. That is the opposite of what a concentration limit is for. Regulation T, 12 CFR Part 220, governs initial margin for securities purchases (eCFR: https://www.ecfr.gov/current/title-12/part-220), and FINRA Rule 4210 sets maintenance margin requirements along with the pattern day trader framework (FINRA Rule 4210, Margin Requirements: https://www.finra.org/rules-guidance/rulebooks/finra-rules/4210). Buying power is derived from those mechanics and from the current market value of your collateral.

The practical consequence is that the same written sentence permits a different dollar position depending on the market. After a rally, collateral value is higher, so the figure your app shows as available to trade is larger, and a percentage of that figure authorizes a larger buy. After a decline, the figure shrinks and the rule tightens. A concentration policy that loosens into strength and tightens into weakness is not functioning as a risk control.

There is a second problem with borrowed denominators. In a margin account, the firm’s requirements can force action on the firm’s timetable rather than yours, so the position you sized against buying power is also the position most exposed if requirements are not met. FINRA’s investor-facing material on margin accounts describes how margin borrowing works and the requirements that apply (FINRA Key Topics, Margin Accounts: https://www.finra.org/rules-guidance/key-topics/margin-accounts), and the Investor.gov glossary entry for a margin account describes an account in which the customer borrows from the brokerage firm to buy securities (Investor.gov Glossary, Margin Account: https://www.investor.gov/introduction-investing/investing-basics/glossary/margin-account).

In a cash account, settled cash is the funding gate. A purchase there has to be paid for in full, and Regulation T, 12 CFR Part 220, sets out the cash account framework, including the payment period and the treatment of selling a security before it has been paid for (eCFR: https://www.ecfr.gov/current/title-12/part-220). That mechanism is why brokers flag good-faith and free-riding problems and can restrict an account, and it is the reason your written process should ask where the money came from before it asks how big the position is.

That makes the practical test narrow and checkable. Before entering a buy, confirm the cash you intend to use is settled and is not the unsettled proceeds of a sale you placed in the same window. If it is unsettled, the choice is to wait or to reduce the order, and either way the sizing limit itself does not change, because the denominator was fixed at your measurement time.

Keeping the two checks apart also makes a near-miss easier to read later. A rejected or delayed buy caused by unsettled proceeds is a funding event, which belongs in the trade log as a timing note. A rejected buy caused by your concentration cap is a policy event, which belongs in the review of the policy itself. Mixing them produces a record where you cannot tell whether the rule worked.

Most position limits are not overridden, they are reinterpreted. The fix is a definition specific enough that two people reading your document would arrive at the same figure. State the measurement time, such as the prior business day’s close. State whether cash is inside the denominator. State that any margin debit is subtracted. State how pending transfers are treated, one way, every time.

Then settle the scope question explicitly, because a limit per account and a limit per household are different rules. If the same ticker sits in a taxable brokerage account, an IRA, and an employer plan, a stated percentage applied separately in each place can add up to a household concentration you never authorized. Write down which accounts are inside the denominator and which ones you track but deliberately exclude.

Finally, pick a re-measurement cadence rather than re-measuring whenever a trade idea appears. A fixed cadence, for example the first business day of each month, gives you a denominator that was chosen before the trade rather than around it. Log the value you used so the sizing decision can be reproduced.

If your checklist pulls holdings and cash through a data connection, the denominator is only as good as the feed. Consumer-permissioned access to financial account data now sits inside a rulemaking framework: the Consumer Financial Protection Bureau issued its personal financial data rights final rule under Section 1033 of the Dodd-Frank Act in October 2024, addressing how covered data providers make consumer financial data available to consumers and authorized third parties (CFPB, Required Rulemaking on Personal Financial Data Rights: https://www.consumerfinance.gov/rules-policy/final-rules/required-rulemaking-personal-financial-data-rights/). A standard interface is still not the official record of your account.

So name the authoritative source in your rules: the broker’s confirmations and account statements. Treat the connected figure as a convenience layer that must agree with the statement, within a tolerance you wrote in advance, before a sizing or concentration check is approved. Add a staleness test too, so the gate fails when the feed’s as-of timestamp falls outside your stated window.

Label mapping is the other recurring failure. A third-party tool showing available cash may not mean the broker’s settled cash or its cash available to trade, and buying power is a separate figure again. Build the mapping table once, and route any unresolved discrepancy to the carrying firm in writing, since SIPC describes protecting customers of failed member brokerage firms within stated limits and not declines in the value of securities (SIPC, What SIPC Protects: https://www.sipc.org/for-investors/what-sipc-protects).

If any account in scope uses margin, one percentage is not enough. Add a second ceiling stated in dollars, or as a percentage of equity after a hypothetical drawdown you choose, so a maintenance requirement cannot force liquidation of the very position the rule was written to bound. Maintenance margin requirements and the pattern day trader framework are set out in FINRA Rule 4210 (https://www.finra.org/rules-guidance/rulebooks/finra-rules/4210).

The hypothetical is the useful part. Size the position against today’s equity, then recompute the weight using an equity figure reduced by a stated percentage and ask whether the resulting weight still passes your cap and whether the account still meets requirements. If either answer is no, the position is too large today regardless of what buying power currently displays.

Also write down that margin borrowing is borrowing. FINRA’s margin accounts material covers how it works and the requirements involved (FINRA Key Topics, Margin Accounts: https://www.finra.org/rules-guidance/key-topics/margin-accounts), and the Investor.gov glossary defines a margin account as one where the customer borrows from the brokerage firm to purchase securities (Investor.gov Glossary, Margin Account: https://www.investor.gov/introduction-investing/investing-basics/glossary/margin-account). A sizing rule that ignores the debit is describing a portfolio you do not fully own.

Once the size is set, the remaining decisions are execution and tax, in that order, and neither should be allowed to change the authorized size. Decide the default order type in the policy rather than at the order screen. Investor.gov explains that a market order is an order to buy or sell immediately, which guarantees execution but not the price, while a limit order executes only at the limit price or better and may not execute at all (Investor.gov, Types of Orders: https://www.investor.gov/introduction-investing/investing-basics/how-stock-markets-work/types-orders). Write the fallback for an unfilled order before you place it.

For the tax step, keep it subordinate to the portfolio rule: set the target weight first, then choose lots and timing. Holding period determines whether a capital gain or loss is short-term or long-term (IRS Tax Topic 409, Capital Gains and Losses: https://www.irs.gov/taxtopics/tc409), and the wash sale rule can disallow a loss when substantially identical stock or securities are acquired within the 30 days before or the 30 days after the sale (IRS Publication 550, Investment Income and Expenses: https://www.irs.gov/publications/p550).

One cross-account caution belongs in the checklist. A broker generally applies wash sale adjustments based on activity in the accounts it carries, so purchases elsewhere, including some retirement accounts, can produce a different result than a single statement implies. Read the primary guidance directly (IRS Publication 550: https://www.irs.gov/publications/p550) and take unusual fact patterns, such as dividend reinvestment near a loss sale, to a qualified tax professional rather than resolving them inside the checklist.