MARGIN IN FUTURES
WHAT IS MARGIN?
Securities or stock margin is the money a trader borrows as a partial down payment, upto 50% of the purchase price, to buy and own a bond, share or ETF. This practice is often referred to as buying on margin.
Whereas future margin is the amount that a trader must deposit and keep in hand with the broker when they open a futures position. It is not a type of down payment and they do not own the underlying commodity. It generally represents a smaller percentage of the notional value of the contract which is typically around 3-12% per futures contract as opposed to up to 50% of the face value of securities bought on margin.
MOVING WITH THE MARKET
When markets are changing on a daily basis and that too rapidly, prices become more volatile, market conditions and the clearinghouses margin methodology may result in higher requirements of margin to account for enhanced risk. When market conditions and the margin methodology warrant, the requirement of margin may decrease.
TYPE OF FUTURES MARGIN
1. Intraday Margin:
It is the minimum account balance required by the broker to hold a position of one (short or long) contract during the market hours. This is also sometimes called day trading margin.
2. Initial Margin:
It is the pre-contract minimum fund required by the stock exchange that must be maintained in the account to hold an overnight position. This is also called an overnight margin for this reason.
3. Maintenance Margin:
This is the minimum amount of money that must be maintained at any given point of time in your account.
If the funds in the account drop below this margin level, following things can happen:
- The position may be liquidated automatically once the level drops below the margin level.
- The trader may receive a margin call where they will be required to add more amount immediately to bring the account balance back to the margin level.
- The trader may be asked to reduce his position in accordance with the amount of funds remaining in your account.
MAINTAINING APT EXCESS MARGIN
Excess margin can be explained as the amount of equity in a brokerage account above the minimum margin requirements. Excess margin management is a significant concept in future trading as failure to maintain sufficient levels of margin can result in possible liquidation or maybe fines from the brokers.
This simply indicates closing out of a short or long future position and may also be referred to as an offset. It results from having insufficient intraday margin.
- Margin Call:
It is a request from your broker to bring margin deposits up to the required level to avoid partial or full liquidation. A margin call results from having insufficient initial margin.
Trading at full leverage signifies leaving no excess margin and therefore no room for any error. While trading at full leverage, if a trader moves one tick against you, your position can be risky due to forced liquidation from the trade desk. Any account in debit is considered in violation of margin and subject to liquidation.
To summarise, the easiest way to manage excess margin is to trade contract sizes that are suitable and apt for your predetermined risk levels and account size.
Futures margin is the sum of money that you must deposit and keep on hand with the broker while opening a futures position. It is not a down payment and you need not own the underlying commodity.
The term margin is used across different and multiple financial markets. Nevertheless, there is a difference between futures margin and securities margins. Understanding and getting hold of the difference is essential priority to trading futures contracts.