More Articles Looking at Pros & Cons of Using Discount Brokers…

by: Mohammad Hafiz

More Articles Looking at Pros & Cons of Using Discount Brokers How to Trade Oil on Stock Exchange How to Open an Account to Futures Trade How to Buy Options if You Don't Own Stock How to Plan Trading Objectives in Futures Trading How Do I Get the Best Price on a Stock or Commodity Trade? To trade futures, you must first set up a brokerage account with a licensed futures broker. Each broker sets its own policies regarding minimum funding for an account, so by shopping around you can often find brokers with very low minimums — as low as $100 at publication date; however, this is an unrealistically low number for trading futures because of margin requirements and wide price swings. It is more likely you would need several thousand dollars to comfortably begin trading futures.

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Initial Margin Margin is cash you deposit in your futures brokerage account to partially pay for your trades. In futures trading, you must put down from 2 to 10 percent of the contract value as margin, which acts as collateral and is mandated by the futures exchanges. Initial margin is the amount needed to open a futures position, and the amount varies with the type of futures contract and the policies of the futures exchange. For instance, the initial margin on an S&P; 500 index futures contract worth $350,000 is $19,250 on the Chicago Mercantile Exchange. Mark to Market The value of a futures contract is constantly changing in concert with the price movements of the underlying asset. The contract buyer makes money when the asset price increases, while the seller profits from price declines. Futures exchanges mark contracts to market every day — the day’s change in value is transferred from the margin account of the losing side to the winning side’s account. You must always keep enough cash in your account to pay for your day’s losses, or else your contracts may be liquidated. Maintenance Margin Maintenance margin is the exchange-mandated minimum amount that must be kept in a brokerage for each open contract. It is usually less than the initial margin. Because the margin amount is small compared to the contract price, the position is leveraged — a small movement in the price of the underlying asset can cause a large percentage move in the contract value. That is why it is unrealistic to consider trading futures without enough cash to safely cover the daily price movements of your futures contracts. Example Margin Requirements The initial margin requirement for a light sweet crude oil futures contract worth, say, $85,000 on the New York Mercantile Exchange ranges from $4,500 to $5,600, depending on how much time remains until contract expiration. That’s a range of 5.2 to 6.6 percent of contract value. On the same exchange, a foreign currency futures contract on Canadian versus U. S. dollars valued at $101,370 requires $1,320 initial margin, which is a mere 1.3 percent. The margin requirements of each exchange’s contracts are posted at the exchange websites.

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References (3) CME Group: CAD/USD FuturesCME Group: Light Sweet Crude Oil (WTI)CME Group: S&P 500 Futures Resources (3) "Starting Out in Futures Trading"; Mark J. Powers"The Very Latest E-Mini Trading, 2nd Edition: Using Market Anticipation to Trade Electronic Futures"; Michael J Gutmann"Trading Futures For Dummies"; Joe Duarte About the Author Based in Chicago, Eric Bank has been writing business-related articles since 1985, and science articles since 2010. His articles have appeared in "PC Magazine" and on numerous websites. He holds a B. S. in biology and an M. B.A. from New York University. He also holds an M. S. in finance from DePaul University.

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