Posted on 02 November 2011.
A futures margin is designed to allow a retail trader to hold shares of a commodity that has a much greater value than the trader has in available capital. This is possible because of the small moves typically experienced during the trading day of a commodity. By accessing a large amount of capitol with a small margin, a trader significantly increases both their potential risk and potential reward.
Each commodity traded will have a pre-set amount that is required per contract bought or sold at a commodities exchange. This futures margin will serve as a good faith deposit and a safeguard that the trader will be able to cover any losses accumulated during a trading day. At the end of each day, contracts are settled and profits or losses will be transferred to the traders margin account. When losses cause a traders margin account to drop below the margin requirements for a specific commodities contract, that trader will no longer be able to trade that commodity until margin requirements are satisfied.
Futures margin provides a trader with access to large quantities of gold, oil, wheat, and other consumable products. This leveraging of capital allows small investors the opportunity to become involved in markets that would otherwise be inaccessible. A futures margin account requires the investor to speculate as to what the delivery price of a contract may be at some point in the future. The trader will be analyzing market conditions or trending patterns to determine their trading strategy based on future expectations. This helps to stabilize volatile markets and protect producers from unexpected losses. A futures margin is a trading tool that allows and investor to speculate on the future price of a commodity and use a small amount of capital to control a large amount of a product.
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