Margin Trading

In the futures market, margin has a definition distinct from its definition in the stock market, where margin is the use of borrowed money to purchase securities. In the futures market, margin refers to the initial deposit of  "good faith" made into an account in order to enter into a futures contract. This margin is referred to as good faith because it is this money that is used to debit any day-to-day losses.

There are two types of margins in futures: initial margin, the required amount of funds that must be deposited by a customer before the positions are initiated; and maintenance margin, the minimum amount of cash/buying power required in order to keep the position. While initial margin requirements must be met at the time of the trade, maintenance margin will only become a factor if the account value is decreasing. In the event that the account value falls below the maintenance margin requirement, a customer will receive a margin call for funds. In this case, the customer will need add enough cash to satisfy the initial margin requirement of the position.

In order to illustrate the difference between initial and maintenance margin, consider the following example:

A customer has $10,000 in a futures trading account. S/he wishes to purchase two contracts of the E-mini S&P. In order to place this trade, s/he would need at least $7,876.00 in the account, the initial margin of two E-mini S&P futures contracts. Since the account balance exceeds the amount of the initial margin, the customer would be able to purchase the two futures contracts.

After this purchase, the market moves against the customer causing the account value to fall to $6,000. Since the account value is less than the maintenance margin of $6,300, the customer would receive a margin call for $1,876, the difference between the initial margin and the account value.

Because trading futures is based on margin trading, it is considered a highly risky investment. Margin trading is a double edged sword and can create profit quickly from a winning trade, but also create a loss just as quickly if the trade is wrong.