Margin and leverage

Futures are traded on margin. A trader does not pay the full value of the contract; they post a deposit, called margin, which the broker and exchange hold against possible losses.

Initial and maintenance margin

• Initial margin: the amount required to open a position, set by the exchange and often raised by the broker.
• Maintenance margin: the minimum the account must hold while the position is open. If the account falls below it, the broker can demand more funds or close the position.
• Day-trading margin: many brokers set a lower margin for positions opened and closed within the same session. It is a broker policy, not an exchange rule, and it can change at any time.

What leverage means in practice

Because margin is a fraction of the contract's value, gains and losses are large relative to the money posted. A move that is small for the index can be large for the account. Losses can exceed the margin deposited, and in fast markets they can exceed the account balance.

That is why traders think in terms of how much they would lose if a trade went wrong, not how much margin a position needs. Margin tells you what you are allowed to trade. It does not tell you what is sensible to risk.

Leverage magnifies losses as well as gains. Nothing in this course is a recommendation to use it.