Initial Margin

Initial margin acts as a security deposit, protecting the broker or clearing house against losses if the price moves against the investor and they fail to pay.

For example, to open a futures contract worth 100,000, an exchange might require initial margin of 10,000. The investor controls a position worth ten times their deposit, so a 10% move in the contract's value would equal the entire margin.

Initial margin requirements are set by exchanges, clearing houses and brokers, often within limits set by regulators. They are usually higher for more volatile assets, because larger price swings mean larger potential losses. Requirements can be raised during periods of market turbulence.

When buying shares on margin, initial margin is the portion of the purchase price the investor must pay with their own money, while the broker lends the rest. In the United States, regulations generally require initial margin of at least 50% for share purchases.

Once a position is open, the account must stay above a lower level called the maintenance margin. If losses push it below that level, the investor receives a margin call and must add funds.