Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 100

    maintenance margin. At this point or some point before, you will receive a notice from your broker known as a margin (or maintenance) call, in which case you must either deposit more cash ($800 in our example) into your account to meet the $5,000 margin requirement or settle some of your contracts to stay within a lower margin requirement. Your broker may (and usually will) opt to settle all or part of your contracts if you don't make the required deposit. If you or your broker fully offset your position, then your losses will be $2,000 (plus commissions). Given your original investment of $6,200 you have a leeway of $6.20/oz. loss on your contracts to consume your entire investment.Of course your broker will require more cash deposits from you long before you reach this position. Otherwise he will have no assurance that you will not skip town if your contracts continue to lose money. That is why your broker may offset your positions if you don't meet your margin requirements. (As you agent, your broker will be ultimately responsible to make good or settle the contracts.)

The same margin rules also apply to selling contracts. For example, when you sell ten gold contracts at $310/oz., don't expect to receive $310,000 in your account (unless you actually own that much gold and it is registered with the clearing house for this purpose). You would once again require an initial margin in your account and your account must stay within the required maintenance margin to insure against potential losses if gold prices rise. And yes, you will receive the dreaded margin call from your broker if those contract prices rise beyond a certain point.

As you can see from the above example, margin gives you leverage, translating to large profits or losses given small price movements in the underlying commodities. You will never be able to realize such high


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    Table of Contents Copyright and Disclaimer Foreword Money
    Bonds Futures Stocks Options
    Mutual Funds Retirement Final Words Appendix A

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