Futures trading definitely is a world unto itself. For a new trader getting started, the list of things to learn can seem endless. Naturally, it seems the first place new traders go to get answers is their new broker. After all, they were so nice when setting up your account.
To help alleviate the sheer number of calls, we spoke with a couple brokers to learn what some of the most common questions new traders have for them. Here are six of the most common, and a brief answer.
1. “What is margin?”
Unlike securities where investors must purchase shares at full value, the futures industry allows traders to employ leverage. This means a trader can control a position much larger than his bank account otherwise would allow. To do this, though, he must meet an initial margin requirement and then keep his account above the maintenance margin requirement.
Donna Heidkamp, president at RJO Futures, explains that margin requirements are set at the exchange level and are standard industry-wide. She recommends that traders maintain an account balance two to three times higher than the maintenance requirement to avoid a margin call. “If your account drops below the maintenance margin requirements set by the exchange, then you would be required to either add funds back up to the initial margin requirement or liquidate some or all of your position,” she says.
Additionally, although margins are standard across the industry, they can be changed by the exchanges. “[Margin] can change pretty radically,” says Steve Sanders, senior vice president of marketing at Interactive Brokers. “If there’s been a lot of volatility in oil over the last week, you can expect there to be an increase in oil margin.”