Futures trading is the practice of buying and selling futures contracts, either to hedge risk as a commercial producer or consumer of actual commodities, or to seek investment gains as a speculator/investor. When you enter into a futures or option contract through an individual account, you are required to make a payment referred to as a "margin payment" or "performance bond." This payment is small relative to the value of your market position, providing you with the ability to "leverage" your funds. Because trading commodity futures and option contracts is leveraged, small changes in price, which occur frequently, can result in large gains or losses in a short period of time.
Each day, your broker will calculate the current value of futures and option contracts held in your account. If the equity in your account has declined in value to the "maintenance margin level" (approximately 75 percent of the amount required to enter into the trades originally), you are required to provide more margin money to restore the initial margin level (this is called a "margin call"). This eliminates the need to make repeated margin calls when daily price changes are relatively small.
If you fail to meet a margin call within a reasonable period of time, which could be as little as one hour, your brokerage firm may close out your positions to reduce your margin deficiency. If your position was liquidated at a loss, you would continue to be liable for that loss. You can, therefore, lose substantially more than your original margin deposit.
If you are trading in a commodity pool, you have purchased a share or interest in the pool, and it is the pool itself that must make the performance bond payments and margin calls described above. Your contractual obligations as a participant in the pool, including your liability for any losses to the pool, must be described in the pool's disclosure document.
Futures Trading Before the Industrial Era
Development of Modern Futures Trading