Initial margin is the amount of money or collateral an investor must deposit with a broker to open a leveraged position in a financial asset, such as stocks, futures, or options. It acts as a security deposit to ensure that the investor has enough funds to cover potential losses.
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Initial margin sets the minimum capital required to take on a leveraged trade.
The initial margin is typically a percentage of the total value of the trade, and it varies depending on the asset being traded and the broker's requirements. For example, if an investor wants to buy $10,000 worth of stock with 50% margin, they would need to deposit $5,000 as initial margin. The purpose of the margin is to protect the broker and ensure the investor can meet the obligations of the trade.
If the value of the position moves unfavorably, the investor may be required to deposit additional funds to maintain the position, known as a margin call.
Short example:
Suppose an investor wants to buy $20,000 worth of futures contracts with a 10% initial margin requirement.
The investor must deposit $2,000 as initial margin to open the position.
If the market moves against the investor and the position loses value, the investor may need to add more funds to avoid a margin call.
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