Initial margin is small relative to the value of a futures contract so that transactions are "leveraged" or "geared". As such, transactions in futures carry a high degree of risk. A relatively small market movement will have a proportionately larger impact on the funds you have deposited or will have to deposit: leverage can work against you as well as for you. Because of the inherent risk of futures, you should only trade with risk capital, that is, money that you can afford to lose.
Because of leverage, you may sustain a total loss of initial margin funds and any additional funds deposited with the FCM to maintain the equity in your position. If the market moves adversely or margin levels are increased, you may be called upon to pay substantial additional funds on short notice to maintain your futures position. If you fail to comply with a request for additional funds within the time prescribed, your position may be liquidated at a loss and you will be liable for any resulting deficit.
It is important to manage leverage. Beginning traders should develop the habit of curtailing trading as is necessary to maintain sufficient excess margin in their account. Futures positions and account equity should be monitored daily.
The above story is the opinion of the author only and it does not reflect
iStockAnalyst opinion. Further, the author is not personally advising you
regarding the suitability of the story for your investment needs. In no event
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