What is margin in futures and it’s types? Initial vs Maintenance margin explained with example

The world of futures trading is nothing short of amazing, and margin’s role was pivotal. Picture yourself in a bustling market where you can risk your money on the future costs of commodities such as oil, gold, or corn. You are not required to pay the entire amount of the contract at once. Rather, you only have to deposit the margin, which can be seen as a kind of security deposit. With this margin, you are assured that you will be able to deal with any losses that might occur during the price fluctuations. Initial margin and maintenance margin are the two primary players in this margin game.

What is Margin in Futures Trading?

In the world of futures trading, margin refers to the amount of money that a trader needs to deposit with the broker to open and keep a position in the market. It is not the cost of purchasing the asset but a guarantee to the broker that you are able to buy the asset should the loss go that far. Due to the fact that futures contracts are very much leveraged, meaning you control a large value of the contract with a small amount of your capital, the margin acts as a risk-sharing mechanism. Should the market turn against you, and your losses reduce your margin to a certain level, then you will receive a “margin call” to deposit more money into your account to keep up the position. To sum it up, the margin is the key that releases the potential of leverage, making it possible to earn more but also requiring you to already have invested in the market to cover the losses.

Types of Margin in Futures Trading

Initial Margin:

• What it is: The security deposit required to be paid in advance for a new futures position to be opened. It is the least amount of money that has to be in your account to be able to trade.
• Purpose: To assure that you will not have to top up your account if there are any initial losses. It is a confirmation of honesty.
• Example: The broker states that the Initial Margin for Gold futures contract is $10,000. In order to purchase or sell one contract, your trading account should contain $10,000 at the very least.

Maintenance Margin:

• What it is: The lowest account balance that you are required to keep after opening your position. This amount is always less than the Initial Margin.
• Purpose: To act as a safety net. A margin call will be given if your losses reduce your account equity to this level.
• Example: Your Gold contract has a Maintenance Margin of $9,000. Your position will stay open if your account equity is always above $9,000.

Initial vs Maintenance margin with example

Feature	Initial Margin	Maintenance Margin
When required	To open a new position	To keep the position open
Amount	Higher (e.g., 10% of contract value)	Lower (e.g., 75% of Initial Margin)
Purpose	Ensures you have skin in the game	Protects against excessive losses
If balance falls below	N/A (you haven’t opened yet)	→ Margin Call issued

Example: Trading a Gold Futures Contract

Let’s assume the following for one Gold futures contract:

• Contract Value: $200,000
• Initial Margin Requirement: $12,000
• Maintenance Margin Requirement: $10,000

Step 1: Opening the Trade

Your conviction about the future rise of gold prices prompts you to buy a gold futures contract.

• The broker requires you to maintain a minimum balance of $12,000 in your account for the Initial Margin in order to open this position.
• You put in the $12,000 and trade is done. Your account is now showing a balance of $12,000.

Step 2: The Trade Moves Against You

Unfortunately, the value of gold declines resulting in an unrealized loss of $2,500 for you.

• Your fresh account equity is: $12,000 – $2,500 = $9,500.
• Now, compare this with the Maintenance Margin of $10,000.

Step 3: The Margin Call is Triggered

• Your Equity Ratio is now at $9,500.
• The Maintenance Margin requirement of $10,000 was violated. This prompts the Margin Call to initiate.

Step 4: Your Required Response (The Variation Margin)

A margin call signals that your broker wants you to provide additional capital right away.

• In order to respond to the call you have to transfer a sufficient amount that will restore the balance of your account to the Initial Margin level ($12,000), not just the Maintenance level.
• In other words: $12,000 (Initial Margin) – $9,500 (Current Equity) = $2,500.
• There is an immediate requirement for you to deposit $2,500. This new deposit is referred to as the Variation Margin.

Your account will be restored to the Initial Margin level, and your position will stay open if you deposit the $2,500. If you do not make the deposit the broker will automatically liquidate your position to cut the losses.

Conclusion

The margin mentioned is not only a figure but also a manager of risk and the one who gets to be part of the thrill of futures trading. Initial margin is like an entry pass, it is the money paid in advance that allows you to get into the market. Maintenance margin is your safety net, the very least that you should keep in your account for the purpose of keeping your positions open. Trading margins are the inseparable components that make sure the futures market is always smooth and that traders are going through the prices’ ups and downs with ease. It is a must that you grasp these ideas; otherwise, you will be simply knowing the rules of the game.

FAQs