What is margin?
Futures and commodities are traded on margins. Margin is like “earnest money,” in which you are required to set aside a certain portion of funds in order to trade a futures contract by borrowing money from your Exchange. It’s almost like a “down payment,” but for holding an open speculative position rather than a sale.
Is the margin taken out of my account?
Yes, and it’s given back to you once you close the transaction.
If I still have money left in my account left after I post the margin, can I use the rest to trade other futures and commodities?
Yes, you can. Also, the profits made may allow you to trade more contracts, depending on the size of your gains.
What is the maintenance margin?
This is the amount of capital that your account must remain above. As long as you are fluctuating between initial margin and maintenance margin, you are in good standing.
What is the difference between day trading margins and overnight margins? Are they different?
Yes, totally different. If you keep positions past the day trading session, you will need to post the margin dictated by the exchange. BCM and clearing firms do not control the overnight margins. You must post exactly what the exchange dictates.
What is a margin call?
A margin call is when your cash falls below the necessary requirements to hold your futures positions. You must either liquidate all or partial positions. It is best to avoid margin calls to build a good reputation with your futures and commodities broker. Also, many brokers no longer give “margin calls” — they often liquidate enough of your position to keep you above the required margin level.
Fees and Commissions
Traders pay brokers’ commissions on a per-contract basis.
The exchange charges per futures contract and the amount varies from one commodity to another.
Today’s commissions are also very low relative to the leverage that you get as a trader. For example, consider when you trade crude Oil you trade 1,000 barrels.
When trading Gold, it’s 100 ounces. The same goes for many other commodities, and that is why big traders overlook the cost because many times it is not material.