Margin

1. Definition

Margin is the collateral that an investor has to deposit with their broker or exchange to cover the credit risk the holder poses for the broker or the exchange. * Think of it as a "Down Payment" or a "Good Faith Deposit" to ensure you will fulfill the contract.

2. Key Types

1. Initial Margin: The minimum amount of capital required to open a new position.
   • Example: To buy \$10,000 worth of futures, you might only need to deposit \$1,000 (10%).
2. Maintenance Margin: The minimum amount of equity that must be maintained in the margin account after the purchase has been made.
   • If your account value drops below this level due to losses, a Margin Call is triggered.
3. Variation Margin: The additional funds needed to bring the account back up to the initial or maintenance level.

3. Function

• Leverage: Margin allows investors to control large positions with a relatively small amount of capital.
• Risk Control: It protects the brokerage firm from default risk. If the trader loses more than their margin, the broker can liquidate the position to recover funds.