What Is Initial Margin? A Simple Guide for New Traders

When you start trading futures, options, or trading on margin, you'll quickly run into the term "initial margin."

It sounds complicated, but it's actually a straightforward concept. Understanding it can help you manage your trading account better and avoid unpleasant surprises.

Here's what initial margin means and how it affects your trades.

What Is Initial Margin?

Initial margin is the minimum amount of money you need to deposit to open a leveraged position.

Think of it as a security deposit. When you want to trade futures contracts or use margin to buy stocks, your broker requires you to put up a certain amount of cash upfront. That amount is the initial margin.

It's not the full value of the position. If you're trading a futures contract worth $50,000, you might only need to deposit $5,000 as initial margin. The broker lends you the rest of the buying power.

This allows you to control larger positions with less capital. But it also means you're taking on more risk, because gains and losses are calculated on the full position size, not just your margin deposit.

Why Brokers Require Initial Margin

Brokers use initial margin to protect themselves.

When you trade on margin, you're essentially borrowing money or leverage from the broker. If your trade goes against you and you lose more than your account balance, the broker is on the hook for that loss.

The initial margin acts as a buffer. It ensures you have enough equity in your account to cover potential losses before the broker needs to step in.

Exchanges and clearinghouses also set minimum margin requirements to maintain stability in the markets. These requirements vary based on the asset you're trading and its volatility.

How Initial Margin Works in Practice

Let's walk through an example.

Say you want to trade one E-mini S&P 500 futures contract. The contract value might be around $200,000. But the initial margin requirement set by the exchange could be $12,000.

You deposit $12,000 into your margin account. That deposit allows you to open the position and control the full $200,000 contract.

If the market moves in your favour and the contract gains value, your account equity increases. If it moves against you, your account equity decreases.

The key point is that you're only required to deposit the initial margin to open the trade. You don't need the full contract value sitting in your account.

Initial Margin vs Maintenance Margin

Initial margin and maintenance margin are related but different.

Initial margin is what you need to open a position. Maintenance margin is the minimum amount you need to keep the position open.

Once your position is active, your broker monitors your account equity. If losses reduce your equity below the maintenance margin level, you'll receive a margin call.

A margin call means you need to deposit more funds to bring your account back above the maintenance margin. If you don't, the broker can close your position to prevent further losses.

Here's an example. Say the initial margin for a futures contract is $10,000, and the maintenance margin is $7,500. You deposit $10,000 and open the position.

If your trade loses $3,000, your account equity drops to $7,000. That's below the $7,500 maintenance margin. You'll get a margin call and need to deposit more money or close the position.

The maintenance margin is always lower than the initial margin. This gives you some breathing room for normal market fluctuations without immediately triggering a margin call.

Initial Margin vs Variation Margin

Initial margin and variation margin serve different purposes.

Initial margin is what you deposit upfront to open a position. Variation margin refers to the daily cash flows that occur as your position gains or loses value.

In futures trading, positions are marked to market at the end of each trading day. That means gains and losses are settled daily.

If your position gained $500 today, that $500 is credited to your account as variation margin. If it lost $500, that amount is debited from your account.

This daily settlement process is different from initial margin, which is a one-time deposit to open the position. Variation margin keeps your account current with the real-time value of your positions.

Some traders get confused by these terms because both involve moving money in and out of the account. But initial margin is about opening positions, while variation margin is about settling daily changes.

Factors That Affect Initial Margin Requirements

Not all positions have the same initial margin requirements.

The exchange or broker sets these requirements based on several factors.

• Volatility. More volatile assets require higher initial margin. If an instrument frequently makes large price swings, the broker needs a bigger buffer to cover potential losses.
• Liquidity. Less liquid markets often have higher margin requirements. If a position is hard to exit quickly, the broker faces more risk and requires more initial margin.
• Position size. Some brokers offer volume discounts or charge higher margins for larger positions. This varies by broker and asset class.
• Account type. Retail traders usually face higher margin requirements than institutional traders. Brokers assess risk differently based on account size and trading experience.
• Regulatory rules. Regulators like the CFTC and exchanges set minimum margin levels for certain products. Brokers can require more than the minimum but not less.

Check with your broker or exchange to see current margin requirements for the assets you want to trade.

How to Calculate Position Size Based on Initial Margin

Knowing the initial margin helps you determine how many contracts or shares you can trade.

Let's say you have $50,000 in your trading account. You want to trade crude oil futures, and the initial margin is $5,000 per contract.

Divide your account balance by the initial margin: $50,000 ÷ $5,000 = 10 contracts.

In theory, you could trade up to 10 contracts. But that would use 100% of your capital as margin, leaving no room for losses.

A safer approach is to use only a portion of your capital for margin. Many traders follow the rule of using no more than 10-20% of their account on margin at one time.

If you follow the 20% rule with a $50,000 account, you'd allocate $10,000 for margin. That allows you to trade 2 contracts instead of 10, giving you much more cushion for market fluctuations.

Risks of Trading on Margin

Trading with initial margin amplifies both gains and losses.

If you control a $100,000 position with $10,000 in initial margin, a 5% move in your favor gives you a $5,000 profit. That's a 50% return on your margin.

But a 5% move against you means a $5,000 loss, which wipes out half your initial margin. And if the market keeps moving against you, you could lose more than your initial deposit.

This leverage is what makes margin trading risky. Small percentage moves in the underlying asset create large percentage changes in your account equity.

Many new traders underestimate this risk. They see the potential for big gains and ignore the potential for equally big losses.

Before trading on margin, make sure you understand how much you could lose and whether you can afford that loss.

Managing Initial Margin Risk

Here are some ways to manage risk when trading with initial margin.

• Use proper position sizing. Don't max out your account by using all available margin. Leave plenty of room for adverse price moves.
• Set stop losses. Decide in advance how much you're willing to lose on each trade. Place stop orders to automatically exit if the market hits that level.
• Monitor your account regularly. Keep an eye on your equity and margin levels. Don't wait for a margin call to realise you're in trouble.
• Understand the products you're trading. Different instruments have different margin requirements and risk profiles. Make sure you know what you're getting into.
• Keep extra capital in reserve. If you get a margin call, you'll need funds to deposit quickly. Having cash on hand helps you avoid forced liquidations.
• Avoid overleveraging. Just because you can open 10 positions doesn't mean you should. Fewer positions with proper risk management usually work better than maxing out your leverage.

Initial Margin in Different Markets

Initial margin requirements vary depending on what you're trading.

• Futures: Each futures contract has specific margin requirements set by the exchange. These can change based on market conditions. Crude oil, gold, stock index futures, and currencies all have different initial margins.
• Options: Selling options requires margin because you're taking on risk. The amount depends on the option type, strike price, and underlying asset. Buying options usually doesn't require margin since your maximum loss is the premium paid.
• Stocks: In the U.S., Regulation T requires 50% initial margin for stock purchases. If you want to buy $10,000 worth of stock on margin, you need to deposit at least $5,000.
• Forex: Currency trading typically involves high leverage and low margin requirements. You might only need 1-2% of the position value as initial margin. But this also means higher risk.

Always check the specific margin requirements for the instruments you trade. They can change, especially during volatile market conditions.

What Happens If You Don't Meet Initial Margin Requirements

If your account doesn't have enough funds to meet the initial margin requirement, you can't open the position.

The broker's system will reject your order. You'll need to deposit more funds before you can place the trade.

This is different from a maintenance margin call, which happens after a position is already open.

Some brokers might allow you to have pending orders that would exceed your available margin, but those orders won't execute until you have sufficient funds.

It's a safety feature. The broker won't let you take on more risk than your account can support based on initial margin rules.

How Margin Calls Work

A margin call happens when your account equity falls below the maintenance margin level.

When you receive a margin call, you have a few options.

• Deposit more funds. Add cash to your account to bring your equity above the maintenance margin. This is the most straightforward solution.
• Close positions. Exit some or all of your losing positions to free up margin. This reduces your exposure and stops the losses from getting worse.
• Do nothing and risk liquidation. If you ignore the margin call, the broker can liquidate your positions without your permission. They'll close whatever positions are necessary to bring your account back into compliance.

Brokers usually give you a short window to respond to a margin call—sometimes just hours or even minutes in volatile markets. Don't assume you'll have days to figure it out.

The best approach is to never let your account get close to a margin call in the first place. Proper risk management and position sizing help you avoid this situation.

Tools and Resources for Tracking Margin

Most trading platforms show your margin information in real time.

You'll typically see your account equity, used margin, available margin, and margin level as a percentage.

• Account equity is your total account value including open positions.
• Used margin is the amount currently locked up in open positions.
• Available margin is what you have left to open new positions.
• Margin level is usually expressed as a percentage. It shows your equity relative to used margin. If your margin level drops too low, you'll get a margin call.

Check your platform's account summary or margin display regularly. Don't trade blindly without knowing where your margin stands.

Some platforms also offer margin calculators. These tools let you input a potential trade and see how much margin it would require before you place the order.

Common Mistakes With Initial Margin

Here's where traders often go wrong.

• Confusing initial margin with the cost of the trade. Initial margin is not the same as buying the asset outright. You're controlling a larger position with less capital, which means leverage and risk.
• Using all available margin. Just because you can open 10 positions doesn't mean you should. Leave room for market fluctuations.
• Ignoring maintenance margin. Opening a position at initial margin is easy. Keeping it open when the market moves against you is harder if you don't understand maintenance margin.
• Not factoring in daily settlements. In futures, daily marking to market means your margin balance changes every day. Don't be surprised when funds move in and out.
• Overleveraging during volatile markets. When markets get choppy, margin requirements can increase. What was tradable yesterday might require more margin today.

Avoid these mistakes by taking time to understand how margin works before putting real money at risk.

Learning More About Margin Trading

If you're serious about trading with margin, take time to educate yourself.

Read your broker's margin policy carefully. Understand their specific rules for margin calls, liquidations, and interest charges if applicable.

Practice on a demo account first. Many brokers offer paper trading platforms where you can simulate margin trades without risking real money. This helps you get comfortable with how margin affects your positions.

Start small when you move to live trading. Trade one or two contracts until you're confident you understand the mechanics. You can always scale up later.

And consider using risk management tools available at Rize Capital to help you plan trades and manage positions more effectively.

Final Thoughts

Initial margin is the deposit you need to open a leveraged position.

It allows you to control larger positions with less capital, but it also increases your risk. Gains and losses are magnified because they're calculated on the full position size, not just your margin.

Maintenance margin is the minimum you need to keep a position open. If your equity falls below that level, you'll get a margin call.

Variation margin refers to the daily cash flows from marking positions to market. It's different from the initial deposit you make to open the trade.

Understanding these concepts helps you trade smarter and avoid costly mistakes. Use proper position sizing, monitor your account regularly, and never risk more than you can afford to lose.

Margin trading isn't for everyone, but if you approach it with discipline and solid risk management, it can be a useful tool in your trading toolkit.

Disclaimer

This article is for educational and informational purposes only. It is not financial advice, investment advice, or a recommendation to buy or sell any financial instrument. Trading on margin involves substantial risk of loss and is not suitable for everyone. You can lose more than your initial investment when trading with leverage. Past performance does not guarantee future results. Before making any trading decisions, you should consult with a qualified financial advisor and conduct your own research. Rize Capital and the author of this article are not responsible for any trading losses you may incur.