For example, the E-mini S&P 500 contracts are for $50 times the S&P 500 Index value. If the S&P 500 trades at a level of 4,500, the contract value is $225,000. But your broker only requires you to put up $12,650 in margin to take control of the contract.
If the S&P 500 falls 23 points to 4,477, the value of the contract falls by $50 times 23 points, or $1,150. Your broker will take that amount out of your account at the end of the trading day when it's marked to market.
If you only originally funded your account with the $12,650 to buy the contract, that leaves you with just $11,500 in your account. That's exactly the maintenance margin required for the contract. So, if the S&P 500 falls more than 23 points, just 0.5% in this example, you'll be required to add more money to your account.
Swings of 0.5% happen all the time in the S&P 500. It'd be wise to plan for additional margin by padding your trading account with some extra cash.
This also shows the power and risk of using leverage. While a 0.5% swing in the S&P 500 Index's value isn't uncommon, it translates into a more than 9% drop in value for your futures trade. What's more, your broker won't be too happy with you, and you'll need to put up additional cash. The biggest risk is that you don't have enough cash to stomach the volatility, and your broker liquidates your position at a loss before your investment thesis plays out.
The upside, however, is that if the S&P 500 Index (or whichever asset you buy futures in) climbs, your gains will be multiplied, thanks to the leverage afforded by futures contracts. A 0.5% climb 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 futures trading account
Let's say you wanted to trade gold futures. If you were just starting out, the micro gold futures for 10 troy ounces might be purchased 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 per ounce, it only needs to fall about 0.4% before you'd hit maintenance margin levels. So, while you could take control of two contracts for $1,650, depositing a bit more cash could provide the buffer needed to safely trade the gold contracts.
If gold declined just $7.50 pounce, you'd already be facing a margin call. But if you kept $2,000 in your account instead, you wouldn't face margin constraints until gold fell $25 per ounce, reducing your position by $500 in value. You'd need additional cash to maintain your position at that point.er
