Market Operations - Margin Requirements

Of the 120 questions on the Series 3 exam, you can expect around 15 on margins, premiums, limits, settlements, delivery, exercise and assignment.

Margin Requirements
One of the reasons the futures market is so attractive to small investors, is its less stringent borrowing requirements. Margin requirements on futures exchanges are not nearly as high as those in the stock market, and even the individual investor can participate. In fact, futures margins are typically 10 to 20% of a contract's value, as opposed to the 50% currently required for a stock transaction. It behooves the licensed futures trader, then, to be aware of the rules governing margin and their implication for the broader economy.

Future Margins
There is a fundamental difference between futures margins and the margins associated with stocks and other securities; in the stock market, margin represents partial payment, but in the futures market, margin serves as a
performance bond. Because this bond is payable and renewable on a daily basis, it need only cover the anticipated change over the course of one day in the value of the associated futures contracts (marking to market).

Futures margins are generally expressed as dollar values per contract, rather than as the percentage familiar to stock traders.

In the United States, exchanges have a great deal of autonomy in setting margin requirements, although the Commodities Futures Trading Commission (CFTC), the primary governmental regulator of the futures market, has a role to play in the process. Each exchange establishes, and is authorized to revise, margin requirements and the documentation required to substantiate them. Member firms, incidentally, may require larger margins than the exchange minimum.

The amount an investor must have on deposit in her account is the "initial margin."

Once she posts her initial margin and begins trading, she must maintain a minimum balance known as "maintenance margin." If her balance falls below that level, she will receive a "margin call" requiring her to add money to the account or else it will be closed.

The Dreaded Margin Call

"Margin agreements"
are documents of understanding between a brokerage and its client. They specify how and when the firm expects margin calls to be met. While some brokerages may simply require that an investor send a personal check via regular mail, others may stipulate wire transfers or some other same-day transaction. They may also require the security of a cashier's or certified check. This portion of a margin agreement is sometimes called a "transfer of funds agreement." Margin agreements also state the procedures by which the brokerage can liquidate an investor's positions and close an account, if a margin call is not met.

Margin Calculations
Related Articles
  1. Professionals

    The Best Financial Modeling Courses for Investment Bankers

    Obtain information, both general and comparative, about the best available financial modeling courses for individuals pursuing a career in investment banking.
  2. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  3. Stock Analysis

    What Exactly Does Warren Buffett Own?

    Learn about large changes to Berkshire Hathaway's portfolio. See why Warren Buffett has invested in a commodity company even though he does not usually do so.
  4. Markets

    Are EM Stocks Finally Emerging?

    Many investors are looking at emerging market (EM) stocks and wonder if it’s time to step back in, while others wonder if we’ll see further declines.
  5. Markets

    What Slow Global Growth Means for Portfolios

    While U.S. growth remains relatively resilient, global growth continues to slip.
  6. Options & Futures

    Terrorism's Effects on Wall Street

    Terrorist activity tends to have a negative impact on the markets, but just how much? Find out how to take cover.
  7. FA

    CIPM: The Key To A Niche Career In Finance

    CIPM designates usually work as investment performance analysts.
  8. Investing Basics

    Explaining the Liquidity Preference Theory

    According to the liquidity preference theory, investors demand interest in return for sacrificing their liquidity.
  9. Investing News

    Defensive Investing: Learn from a Hedge Fund Pro

    Looking for ideas on companies, sectors or investments to short? Consider the opinion of this hedge fund luminary.
  10. Investing

    Will Eni’s Discovery Affect Oil Prices?

    Following a massive natural gas discovery in the Mediterranean, Egypt's energy concerns will be coming to an end, but how does this affect oil prices?
  1. Swap

    A derivative contract through which two parties exchange financial ...
  2. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  3. Convergence

    The movement of the price of a futures contract towards the spot ...
  4. Crude Oil

    Crude oil is a naturally occurring, unrefined petroleum product ...
  5. Futures Market

    An auction market in which participants buy and sell commodity/future ...
  6. Implied Volatility - IV

    The estimated volatility of a security's price.
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  3. Is a financial advisor required to have a degree?

    Financial advisors are not required to have university degrees. However, they are required to pass certain exams administered ... Read Full Answer >>
  4. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  5. Can I use my IRA to pay for my college loans?

    If you are older than 59.5 and have been contributing to your IRA for more than five years, you may withdraw funds to pay ... Read Full Answer >>
  6. Can I use my 401(k) to pay for my college loans?

    If you are over 59.5, or separate from your plan-sponsoring employer after age 55, you are free to use your 401(k) to pay ... Read Full Answer >>
Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center