In trade parlance, a margin basically refers to the collateral both parties-the buyer and seller-place in a clearing house or in a margin deposit to ensure that both parties will honor the futures trading contract they have voluntarily gotten themselves into. In a sense, margins are a security deposit to ensure that the customer or buyer will fulfill his obligation to pay the ordered goods on a date or period specified in the futures trading contract. The seller has an equal obligation to deliver the goods or products he specified in the futures trading contract so he is also obliged to place surety in the clearing house.
A margin is also referred as performance bond that is the amount of 5 to 15 percent of the total contract value. Margins can be in the form of money or cash, treasury bonds, bank guarantee, and fixed deposit receipts. You can also deposit certificates of your real estate properties as collateral.
The Types of Margins
As mentioned earlier, there are different types of margins. These types of margins are the following:
Among the types of margins that investors can opt for are clearing margins. They are surety between companies or corporations and their customers. Clearing margins are done to ensure that corporations will fulfill their obligations stated in the futures trading contracts.
On the other hand, the initial margin is the required equity amount to secure a futures position. This type of margin can be considered as means of performance bond in the way that the maximum exposure is not limited to the initial margin amount.
The customer margin is also useful within the futures trading industry. The customer margin accounts are always made sure by the Futures Commission Merchants that the sellers and buyers of currency trade maintain their contract obligations. Margins are very important for traders to calculate the market risk and value they would be entering. Customer margins are also synonymously used with performance bond margin.
A term commonly used by speculators in the futures trading market is the margin-equity ratio. This type of margin represents the amount of their capital that is traded at a particular time.
Maintenance margin is also one type that is considered a daily offset of profits and losses. Since futures trading is based on a daily market trend, the prices of commodities vary day by day. Hence, the profit or loss of the trade position can be debited to the futures exchange holders.
Premium margins serve as the collateral that the trader should deposit as an obligation once the option is exercised. This premium margin is an indication that a seller of an option can fulfill his obligation to the trade. Moreover, the premium margin is considered equal to the premium needed as payment to purchase the option back and close his position.
Lastly, the additional margin is aimed at covering the possible fall on the value of the position after the present day of trading. Additional margin is regarded as the potential loss under worst consequences.
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