Most individual investors steer clear of the futures markets, whereasinstitutional giants dominate trading activity. One reason is that the immense leverage that futures offer makes it a risky way to invest. However, that leverage also reduces the amount of money that you technically need to trade futures -- even though investing the minimum can dramatically increase the chances that you'll lose your entire investment.
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Two minimums to keep track of
If you want to trade futures, there are two different minimum investment amounts that you need to consider. First, in order to open an account with a futures broker, you'll have to comply with whatever the broker's minimum deposit requirements are. Some small futures brokers offer accounts with a minimum deposit of $500 or less, but some of the better-known brokers that offer futures will require minimum deposits of as much as $5,000 to $10,000.
The far more important question for futures traders, though, is the amount of margin that the futures exchanges will require you to have on hand in order to open a futures contract. Typically, you'll need to post a relatively high initial margin, and you'll then have to maintain an ongoing margin at a slightly lower amount thereafter.
The exact margin requirements vary by the type of futures contract you want to trade. For instance, at one popular futures broker, initial margin requirements for e-mini contracts on popular U.S. stock indexes are generally in the $4,000 to $7,500 range, with maintenance margin minimums typically about 10% less. On the other hand, foreign-exchange futures have smaller margin requirements of $2,000 to $5,000, and interest rate futures can run as low as $300 to $1,500 for some of the less volatile contracts.
In addition, many types of futures have smaller-sized contracts that involve less leverage and therefore come with smaller margin requirements. For instance, micro contracts on foreign-exchange futures can carry margins of as little as $200 to $400.
Falling below the minimum margin requirements
If your margin falls below the minimums required, then you'll have a limited amount of time to make up the difference in additional deposits. Barring that, your broker will close the position on your behalf, typically locking in a loss.
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Investors also shouldn't misunderstand what the margin requirement means. Technically, you're responsible for any losses on the futures contract, and if commodity prices move abruptly, then your losses could exceed what you deposited in initial margin. In the past, some futures brokers have had to write off customer losses when abrupt market changes occurred, but you're still legally on the hook for losses above your deposit requirement.
Trading in futures can be risky, and it makes sense to commit substantially more capital than the minimum required if you're going to trade futures seriously. Understanding the ongoing capital requirements is essential to avoid the painful experience of having your broker close out a position at the worst possible time.
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