Futures trading typically carries a high risk, but because of this it can also offers high rewards. Futures contracts trade against the value of various commodities and financial instruments. The high level of leverage offered by the futures exchanges allows traders to generate significant profits with a relatively small amount of money. The amount needed to trade a specific futures contract is set by the exchange.
Minimums vs. Safety Margin
When getting involved in futures trading, you will want to determine how much money to start with, and this should include more than just required minimum amounts. There is a significant range of how much money is required to trade different futures contracts. Also, the risk of a trade entering a losing position is very high. If a positional loss is large enough, the broker will close out the trade, locking in the losses and possibly wiping out most or all of the trader's account balance. A new trader should build in a cushion of extra money when determining how much money to use to start trading futures.
Futures are traded with brokers registered with the Commodity Futures Trading Commission (CTFC). Each broker sets its own minimum deposit amounts to open an account. The lowest opening balance for a futures broker account is around $2,500. Most commodity futures brokers require new account holders to deposit a minimum of $5,000 to $10,000. A new trader should compare the requirements of several brokers along with the other costs and services provided.
The main determinant for how much money a traders needs for futures trading is the margin deposit requirement. Each futures contract has a margin deposit requirement set by the futures exchange. When a trader initiates a trade, he must put on deposit the required margin amount for each contract traded. Margin amounts range from $600 to $800 for low-risk contracts like short-term interest rates or natural gas futures to over $10,000 per contract.
Margin Examples and Considerations
Examples of margin deposits on popular contracts include $5,000 on the e-mini S&P 500 futures contract, $11,475 for the standard gold futures and $2,363 for a corn futures contract. This amount is multiplied by the number of contracts traded. A trader should also plan for extra money in the account to cover any margin calls if a trade loses money. Futures trades are marked to market at the end of each day, and if more money in needed to meet the margin requirement, the trader must have it in the account or the broker will close out the trade.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.