Trading futures contracts is one way to add additional leverage to your portfolio or hedge existing positions with minimal capital. If you're considering opening a futures account, you'll need a certain amount of money just to open an account, but you might need even more depending on the type of futures contracts you want to trade.
This article will go over the minimum deposits you'll need when starting to trade futures. It will also cover what might happen if your account dips below the minimum amount needed to trade.
Two minimums to note
There are two minimums new futures traders need to know about when they're opening a brokerage account -- the broker minimum and the margin minimum.
The broker minimum will vary from institution to institution. Minimums have come down quite a bit in recent years. Some brokers have even removed the minimum deposits required for trading futures.
(Be aware that while there may be small or no minimums, commissions on futures contracts vary widely from broker to broker. It's better to choose a broker you like with good commission pricing first, and then determine the minimum deposit required to start trading.)
The margin minimum varies based on the futures contract you want to trade, and it's set by the exchange on which the contracts trade.
Margin, when discussing futures contracts, is different from margin in a stock brokerage account. Margin with stocks is a loan against your portfolio. The margin minimum for futures contracts determines how much you'll need in your account to begin trading specific contracts. For example, the minimum margin to trade the E-mini S&P 500 Index futures contracts is $12,650.
The margin minimum will differ based 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's important for investors to be aware of maintenance margin as well. The margin minimum is usually 10% higher than the maintenance margin requirements. For example, while the minimum needed to begin trading the E-mini S&P 500 Index futures is $12,650, it only requires a maintenance margin of $11,500. This allows for some wiggle room if an investment declines in value.
Falling below the margin
If your account value falls below the maintenance margin, you'll be required to deposit more cash into your account or liquidate your position.
What you need to know is that futures accounts are marked to market at the end of every day. If the value of the contracts you hold declines, that amount comes out of your account. So, depending on the margin requirements, a position doesn't have to move against you very much before you'll need to add more cash to your account.
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
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Proceed with caution
Depending on the type of futures contracts you want to trade, you can get started without very much money at all. Just be aware of what your preferred broker requires in terms of minimum deposits, and be sure to check all available contract sizes for the asset you want.
Consider, however, that the best strategy for trading in futures is to use them as part of a portfolio of stock investments and other assets to add leverage or hedge your current positions. As such, your futures trading account should be proportional to your other investments to keep the portfolio balanced.
Futures trading is an advanced investment strategy and carries significant risk due to the leverage available through margin. You can lose a lot of money very quickly if you're not sure what you're buying or how your trading account works with regard to minimum margin requirements.
