Energy Investing: Understand the Margin in Futures Trading - dummies

Energy Investing: Understand the Margin in Futures Trading

By Nick Hodge, Jeff Siegel, Christian DeHaemer, Keith Kohl

For an energy investor, a margin is the minimal amount of money needed to trade a futures contract through your broker. Basically, the margin is in place to guarantee that you have the money to settle potential losses from a trade.

Unlike stocks, where you can sometimes trade on large margins (with a 50 percent margin, you can trade $10,000 worth of stock with only $5,000), futures contracts have a much lower margin, usually between 5 and 15 percent of the contract, that is enforced by the exchange. Different types of margins include

  • Initial margin: The amount of capital necessary to initiate a futures position. The exchange sets the initial margin.

  • Clearing margin: A safeguard that ensures that both clearing brokers and corporations conduct the open contracts of their customers.

  • Customer margin: This ensures that both buyers and sellers of futures contracts fulfill their contract obligations.

  • Maintenance margin: The minimum margin per outstanding futures contract that you must have to keep your margin account.

The final type of margin, the day-trade margin, is set by your brokerage firm, rather than the exchange on which the commodity trades. Contact your individual broker for more details. As an example, TD Ameritrade’s day-trading margin requirement is $25,000. So to conduct futures trades, you must have minimum capital of $25,000 in your account at the start of the day.