Margins

The topic of this lesson is margin in futures trading. In an earlier example, the risk of default between two parties exchanging gold was discussed. Margin in futures is a mechanism to prevent such default. In order to enter into a contract, whether buying or selling, a trader must put up some money, which is known as margin. This margin acts as a security to prevent the risk of default and is usually a small percentage of the entire contract value.

The margin itself is divided into two parts, span and exposure. As a trader, you will not be able to see these numbers on your broker terminal or anywhere else, but these components of margin are mandated by the stock exchange. The span and exposure margin is calculated three times a day and changes based on volatility. If the stock is volatile, the risk goes up and hence the margin also goes up. If the market remains flat or there is no movement, the margin remains the same.

As a trader, you must maintain the margin with your broker at all times. If you fail to do so, the broker will close your position. You can check the margin before placing an order by using the broker’s terminal or the margin calculator. The margin required is the amount you need to put up to trade one lot of a stock. The margin requirement is the same whether you are placing a buy or a sell order.

In conclusion, margin in futures is an important aspect of trading as it acts as a security to prevent default. Traders must maintain the margin with their broker and must be aware of the margin requirement before placing an order.