For many futures traders, the word margin carries a rather negative connotation. Flashbacks of short-notice bank wires or premature exits from winning trades often haunt practitioners of haphazard risk management. To some, it’s a nasty six-letter word, and margin call is the kiss of death.
Of course, the truth of futures margins is much less dramatic. That’s because it’s an integral part of applying leverage to the financial markets, as done in the trade of derivative products. Without margins, the range of opportunities available to commodity, currency, debt, and equity market participants would decrease exponentially.
Margin is the amount of money needed to control a futures contract. It’s a good-faith deposit made by the trader that ensures all associated parties are vested in the transaction.
In practice, there are three types of futures margins:
It’s important to remember that margins are subject to change. Individual products and current market conditions influence the requirements put forth by an exchange or brokerage. Typically, as volatility grows, so do futures margin requirements.
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At first glance, the concept of margin appears to be just another worry for active traders. However, it serves an important purpose and offers several benefits to futures market participants:
In addition, staying on top of margin requirements has never been easier. Software trading platforms have made monitoring capital obligations routine. Automated alerts and open position/equity reports help active traders make sure that they’re never out of the loop in regards to futures margin.
If you’re going to trade futures, then margin will be an important factor influencing your venture into the marketplace. However, it’s nothing to fear. Futures margin requirements are designed to protect all parties involved. Ultimately, they work to promote and preserve the integrity of the trading environment.
For more information on margins, requirements, and the tenets of risk management, contact our experts here at StoneX.