The commodity futures exchange allow people to take positions in their contracts with a much smaller amount of money than stock buyers are allowed. Th...
The commodity futures exchange allow people to take positions in their contracts with a much smaller amount of money than stock buyers are allowed. This trading without putting up 100% of the money is called going on margin.
The most a stock buyer can go on margin is 50%,
in the wake of laws enacted following the 1929 stock market crash. Prior to that crash, it was normal for people to put up only 10% of the value of the stocks they were buying. Most stock buyers these days pay 100% up front.
But in the world of futures you're not really buying anything -- you're contracting to supply or take delivery of a product.
The amount you put up to begin with is your initial margin. Then your account must continue to have about 70 to 80% of that. You are allowed to go a little below initial margin, because everybody understands the volatility of futures markets.
Your brokerage firm or individual broker decides whether you have enough money in your account to satisfy their margin requirements. At the end of the day your account balance is evaluated to see if you meet exchange set standards.
Depending on your relationship with the firm or individual, they may allow you to have during the day only 10 to 50% of the exchange requirements.
A lot depends on your history. Every futures account is a source of risk to a broker, because futures positions can go negative. Your broker does not want to be a part of any bankruptcy proceedings. Obviously it is easier for them to get any money you owe them from your account while it still has some. Some platforms can auto-liquidate accounts if they appear too risky.
A day trader can close out their positions before the end of the day and not be subject to overnight margin requirements.
however, those with positions are now subject to exchange margin requirements. If they're below where they should be, they may be issued a margin call. In the old days, these were generally telephone calls. Now they're most often done by email.
You can take care of margin calls in three ways: partially or totally liquidate your account. Adjust your trade. Wire more money into your account.
You're usually given three days. The first day call means you must consider taking some action. If you plan to adjust your position, put in the orders now.
On the second day, you're expected to take some action. If you take some action but it's not enough (say your position loses even more money), you're given brownie points for trying.
On the third day, if you haven't eliminated the margin deficit yet, you're in danger of having your account liquidated enough to eliminate the margin.
Your trading plan for the trade should have made provisions for what you would do if the position went against you.
