Futures Education

Initial Margin

Initial margin is the amount of money that is needed in your account to purchase (go long) or sell (go short) a futures contract. The concept of initial margin shouldn't be too difficult to understand since it is very common concept in the real estate industry. If you want to buy a home, you put a deposit down with your contract to purchase or to secure the rights to the home. It is the same concept in futures - you put money down to secure the rights to the underlying commodity.
Referring back to gold contracts, remember we calculated the value of a gold contract at roughly $78,000 dollars. Futures would not be so attractive to investors if you had to come up with $78,000 to buy a piece of paper that says you own 100 troy ounces of gold. Both the exchange and your broker set the minimum initial margin that is required to buy futures. Below is a list of the margin requirements set by the NYMEX for gold.

You will notice that the minimum initial margin for non-members (speculators who have not purchased a membership on the exchange) is $7,425.
Generally, futures margins are much less than the 50% minimum required purchase stock on margin. The performance bond (margin) requirements for most futures contracts range between 2% to 15% of the value of the contract, with most in the 5% area. Margin for single-stock futures is set at 20% of the contract value. These initial margin requirements help provide the power of leverage to commodity trading.
If gold is valued at $78,000 and the minimum margin is set at $7,425, you are putting up roughly 9.5% as a deposit. In other words, for less than a 10% down payment you can control $78,000 worth of gold. This is really not much different than putting a 10% down payment on a house and controlling $200,000 worth of home - only the futures prices go up and down much faster than home prices!

Maintenance Margin

Maintenance margin is the minimum balance that must be maintained in a trading account to keep futures contracts.

Maintenance margin requirements are usually smaller than initial margin requirements. Maintenance margin really doesn't come into play unless your account drops due to losses. If the value of your account balance falls below maintenance level then you are required to get the account back into compliance. This is called a margin call - and it is definitely something you want to avoid! You can satisfy a margin call by sending more money to your brokerage account until your account balance meets the maintenance margin requirements. Or you may reduce your position in the commodity, which will decrease the amount of money needed to satisfy the maintenance margin.