futures trading

A very frequent misconception for investors new to futures trading is the phrase “margins” and what it exactly means. Let’s begin with the meaning of margin as it refers to the stock or equities markets. ‘Margin’ is a term used to explain when finances are borrowed to purchase a stock or security. Basically, ‘Margin’ is a loan typically supplied by a stock broker to it’s client to enable he/she to purchase additional shares of stock with the loan of more funds.

The term ‘Margin’ is in addition current in the commodity futures and options market as well but has an entirely different meaning as compared to the stock markets meaning.

When trading commodity futures, the phrase ‘Margin” is the quantity of funds an investor need to have obtainable in his/her account to open a position in a certain market. ‘Margin’ in commodity futures trading can be considered as a “Performance Bond”. Available “Margin” funds in a clients account act as a deposit of “good faith” in return for establishing a posture in a given market. As an instance, if an investor wished to establish a posture in a specific commodity market, he/she would need to have $1.395* in funds available in his account to take a long or short position for one contract. Again, this ‘Margin’ amount is not subtracted from the futures trading account, it is now acting as a deposit enabling the futures trader to take a postion in that specific commodity market.

Margin is determined by the futures exchange in which you would like to buy on. The original amount of cash the exchange requires you to deposit is known as Initial Margin. Initial Margin can likewise be considered as “Day One” margin as it is the amount of margin necessary when the futures position is originally established. This amount is usually any place between 5-10% of the contract’s overall value, and is periodically dependent on change based upon current market conditions.

Along with the first margin required by the futures exchange, there is also Maintenance Margin for your bank account. Maintenance Margin is a lower dollar amount than Initial Margin and comes into play beginning with the second day of a founded futures position. Essentially, the futures exchange will require a higher deposit to set up a futures position through Initial Margin. Once a futures position has been establish, the exchange then lowers the deposit amount (approximately 20%) owing to Maintenance Margin to give the trade “room to fluctuate”.

If the market moves against your established position and your account equity falls under the maintenance margin, you will receive a Margin Call. A margin call is an invitation from your broker to either deposit funds into your bank account to bring the account value back up to the original initial margin amount or liquidate outdoors futures position. Most futures brokers require margin calls be addressed immediately. If a margin call is not satisfied, the futures broker has the authority to liquidate any open positions in order to satisfy the margin deficit.

A lot of futures traders won’t want to take presentation of the contract they’re trading, so they will liquidate the contract before its expiration date. When a contract in which you possess the human rights is liquidated, your margin deposit is then cleared. Dependent on the upshot of the trade, losses are deducted or gains are put into your futures trading account.

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