Futures trading is a way to add additional leverage to your portfolio or to hedge existing positions with minimal capital. If you are planning to open a futures account, you will need a certain amount of money just to open an account, but you might need even more depending on the type of futures you want to trade.
This article will go over the minimum deposits you will need to start trading futures contracts. It will also cover what could happen if your account drops below the minimum amount needed to trade.
Two minimums to note
There are two minimums that new futures traders should be aware of when opening a brokerage account – the broker minimum and the margin minimum.
The minimum brokerage will vary from one institution to another. The minimums have fallen a lot in recent years. Some brokers have even removed the minimum deposits required to trade futures contracts.
(Be aware that while there may be little or no minimum, commissions on futures vary widely from broker to broker. It is best to first choose a broker you like with a good one. commission rate, then determine the minimum deposit required to start trading.)
The minimum margin varies depending on the futures contract you wish to trade and is set by the exchange on which the contracts are traded.
Margin, when discussing futures contracts, is different from margin in a securities brokerage account. Margin with stocks is a loan on your portfolio. The minimum margin for futures contracts determines how much you will need in your account to start trading specific contracts. For example, the minimum margin for trading futures contracts on the E-mini S&P 500 Index is $ 12,650.
The minimum margin will differ depending on the underlying value of the contracts and the volatility of the contracts. The lower the value, the lower the minimum margin. Additionally, contracts with less volatility will also have relatively lower minimum margin requirements.
It is also important that investors are aware of the maintenance margin. The minimum margin is typically 10% higher than the maintenance margin requirements. For example, while the minimum needed to start trading futures contracts on the E-mini S&P 500 Index is $ 12,650, it only requires a maintenance margin of $ 11,500. This allows for some leeway if an investment loses value.
Fall below the margin
If the value of your account falls below the maintenance margin, you will need to deposit more money into your account or liquidate your position.
What you need to know is that term accounts are priced at the market at the end of each day. If the value of the contracts you hold decreases, that amount goes out of your account. So, depending on the margin requirements, a position doesn’t have to move much against you before you need to add more money to your account.
For example, E-mini S&P 500 contracts are $ 50 times the value of the S&P 500 Index. If the S&P 500 is trading at a level of 4,500, the contract value is $ 225,000. But your broker only asks you to pay $ 12,650 in margin to take control of the contract.
If the S&P 500 drops 23 points to 4,477, the value of the contract drops $ 50 times 23 points, or $ 1,150. Your broker will withdraw this amount from your account at the end of the trading day when it is valued at the market.
If you only initially funded your account with the $ 12,650 to purchase the contract, that leaves you with only $ 11,500 in your account. This is exactly the maintenance margin required for the contract. So if the S&P 500 drops more than 23 points, just 0.5% in this example, you will need to add more money to your account.
Fluctuations of 0.5% occur all the time in the S&P 500. It would be wise to allow for extra margin by filling your trading account with extra cash.
It also shows the power and risk of using leverage. While a 0.5% change in the value of the S&P 500 Index is not uncommon, it results in a drop of more than 9% in the value of your futures trade. In addition, your broker will not be very happy with you and you will have to put in some extra money. The biggest risk is that you don’t have enough cash to withstand the volatility and your broker will liquidate your position at a loss before your investment thesis comes to fruition.
The upside, however, is that if the S&P 500 index (or the asset in which you buy futures contracts) goes up, your earnings will be multiplied, thanks to the leverage offered by futures contracts. A 0.5% rise in the S&P 500 index, for example, is a 9% gain on top of the minimum margin requirements to start trading those E-mini contracts.
An example of a futures trading account
Let’s say you wanted to trade gold futures. If you were just starting out, micro-gold futures for 10 troy ounces could be bought with a minimum margin of $ 825 and a maintenance margin of $ 750. Your broker, however, may have a minimum deposit of $ 1,500.
With gold currently trading around $ 1,860 an ounce, it only needs to drop about 0.4% before reaching maintenance margin levels. So while you can take control of two contracts for $ 1,650, depositing a little more money could provide the buffer needed to safely trade gold contracts.
If gold only fell $ 7.50 an ounce, you would already be facing a margin call. But if you kept $ 2,000 in your account instead, you wouldn’t face margin constraints until gold drops $ 25 an ounce, reducing your position by $ 500 in value. You would need additional cash to maintain your position at this point.
Proceed with caution
Depending on the type of futures contracts you want to trade, you can start without too much money. Just know what your preferred broker requires in terms of minimum deposits, and be sure to check out all of the contract sizes available for the asset you want.
Consider, however, that the best strategy for trading futures contracts is to use them as part of a portfolio of investments in stocks and other assets to add leverage or hedge your current positions. As such, your futures trading account should be commensurate with your other investments to keep the portfolio balanced.
Futures trading is an advanced investment strategy and involves significant risk due to the leverage available through margin. You can lose a lot of money very quickly if you are unsure of what to buy or how your trading account works in regards to minimum margin requirements.