DEFINITION of Margin deposit
A margin deposit is a type of security common in the trading of financial instruments, including foreign exchange and futures and options contracts.
WHAT IT IS IN ESSENCE
A margin deposit is a guarantee that the contract in question will be fulfilled.
It is, also the initial margin, or the deposit, the amount a trader have to put in order to open a leveraged trading position.
Because it is one of two main types of the margin needed to hold an open a leveraged position.
There are two main types: deposit and maintenance.
The amount for deposit margin depends on the derivative which is use and the market where is the trade. Markets with higher volatility will tend to require a higher amount.
HOW TO USE
This is a type of security common in the trading of financial instruments. Including foreign exchange and futures and options contracts.
This deposit is necessary as a guarantee that the contract in question will be fulfilled. It is made with a broker or clearinghouse entity and is normally made via a monetary deposit or with securities.
The margin deposit is necessary as collateral on a financial transaction to cover a portion or all of a counterparty’s credit risk. For ensuring that this party meets its payment obligations.
In the foreign exchange markets, margin deposits are a very common element in transactions such as futures and forward contracts.
Their purpose is to cover the issuer’s risk in case there are adverse price movements in the market or the buyer defaults.
For example, the trader wants to open a CFD trade on 80 shares of Apple, when Apple shares are trading at $100 and Apple has a deposit margin requirement of 20%. The total value of your position is $8000, so the margin is $1600 (20% of 80*100).