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What Is Margin Trading and How Can It Help Me Make Money?

February 14, 2020 by Daniels Trading| Futures 101

At its core, trading is the act of placing capital at risk to realize a financial reward. So it stands to reason that the more money you have, the greater your chance of generating solid returns. Right?

Not exactly. In many areas of finance, the larger your wallet, the greater your earning potential because you generally earn (or lose) a percentage on the amount invested. But this isn’t the case in the futures markets―margin trading provides participants the opportunity to turn a little money into a lot.

What Is Margin Trading?

Margin trading is the use of brokerage funds for the buying and selling of securities. It is prevalent throughout finance, especially in the stock, futures, and forex markets. For active traders, margin serves as the backbone of everyday business.

If you have a mortgage, then you’re probably familiar with the concept underlying margin trading. To secure the mortgage, you had to hand over an up-front commitment of some sort, more than likely a down payment. Although much smaller than the home or asset’s notional value, it served as a good-faith deposit to the lender, who then processed the transaction.

Margin trading works in a similar fashion. To execute a trade, the trader deposits a fraction of the security’s value with a broker. In return, the broker provides the financing necessary to actually facilitate the trade.

Futures Margins

The question still remains: What is margin trading in futures? It’s the buying and selling of contracts using broker-extended credit. A small portion of each contract’s value―3-12 percent―is deposited by the trader and used to open a new long or short position in the market. Because of the modest margin requirements, futures traders are able to leverage their risk capital into formidable returns.

If you’re going to be active in the futures markets, then being able to answer the “what is margin trading” question fully is critical to your success. As a result, it is important to understand the different types of margin requirements. Here’s a quick look at each per Chicago Mercantile Exchange (CME) guidelines:

  • Initial margin: The amount of capital required by the exchange to open a new futures position. Brokers have the option to collect additional funds as deemed fit.
  • Maintenance margin: The minimum amount of capital that must be maintained at all times in the account.
  • Day trade margin: Defined by the broker according to market volatility. These margins are the amount of capital needed to trade one lot of a product on an intrasession basis.

As an example of the three margin types in action, take a look at a typical broker schedule for the E-mini S&P 500 and Micro E-mini S&P 500:

Contract Initial Margin Maintenance Intraday
E-mini S&P 500 $7,260 $6,600 $500
Micro E-mini S&P 500 $660 $660 $100

Margin trading can help you make money in several ways. First, you can use it to enhance your purchasing power and generate extraordinary profits. Second, trading products with reduced initial and intraday margins is useful in limiting risk. This feature is especially valuable when dialing in a specific trade’s exposure or increasing its granularity.

Know Your Futures Margins!

Before jumping into the futures markets with both feet, it is important for you to understand how margin trading works. If you don’t, then the odds of having open positions prematurely liquidated or receiving a margin call increase multifold.

For answers to “what is futures trading” and much more, spend some time reviewing Daniels Trading’s online education portal. Featuring cutting-edge analytics, contract specs, and expert webinars, it is a great place to get up to speed quickly on futures margins.
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Filed Under: Futures 101

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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