Initial margin

Initial margin is the minimum amount of money or eligible collateral a trader must deposit to open a new position in futures or on margin, before any leverage is applied. It represents good faith collateral rather than a down payment on the full value of what is being controlled, and it is set by the exchange or broker to cover the potential loss on a position over a short window of time, typically a single trading day.

Because futures and margin positions are leveraged, the initial margin required to control a contract is a small fraction of the contract's full notional value, which is exactly what allows a trader to gain outsized exposure relative to the cash posted. Exchanges such as the CME set the base initial margin requirements for futures contracts and adjust them as volatility in the underlying market rises or falls, requiring more collateral when a market becomes more turbulent and potential daily losses grow larger.

Initial margin is different from maintenance margin, which is the lower threshold an account's equity must stay above once a position is open. If losses push an account's equity below the maintenance margin level, the trader faces a margin call and must either post more funds or reduce the position, but it is the initial margin that determines how much capital is needed just to get into the position in the first place. Understanding initial margin requirements matters for sizing any leveraged position, since a low initial margin relative to contract value is precisely what makes futures and margin trading capable of producing outsized gains and outsized losses alike.