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Trading Futures vs. Trading Stocks
Futures contracts are complex on margin. Margin is the minimum amount of funds required as deposit to buy or sell short in futures contract. The difference between requirements of margin to buy stock is 50% of the buying price, while the margin required to buy futures contracts varies in about 2 to 10% of the buying price. The margin is defined as the equity amount that must be deposited when buying securities. Consequently, using the margin to negotiate with futures contracts has a bigger role than buying stock and bonds. The initial margin requirement is the amount of money that must be deposited when initiating a position in a futures contract. These minimum amounts are determined for each commodity or financial futures contract by the exchange, but the brokerage firm has the right to increase such minimum amounts required. For example, the requirement of an initial margin for a corn futures contract was $506, a wheat contract $810, and a mini-sized soybean contract $365 effective starting March 4, 2005 according to the Chicago Board of Trade. The market value for futures contracts fluctuates with shifts in prices of the underlying commodity / security. Consequently, brokerage firms require a maintenance margin, which is a minimum amount of funds that must be deposited to hold the position in the account. When the amount of the funds in the account falls below this minimum amount one asks for a margin call. For example, if the initial margin required in deposit for a corn contract is $506, $375 is an amount that could be required as a maintenance margin. Generally, the amount for the maintenance margin is lower than the required initial margin. If the amount of the futures contract falls below the maintenance margin, the investor will need more funds to level again with the additional level of maintenance or the position will be liquidated by the brokerage firm. The requirement for additional funds is referred to as margin call. A margin call is the brokerage firmīs requirement for additional funds in order to keep the position when the account drops below the maintenance margin. The following example illustrates the use of the margin process. |
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