Page 254 - A Canuck's Guide to Financial Literacy 2020

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open a futures position, the broker may require you to keep a certain amount of money on
hand in order to ensure completion.

• Margin - This is a performance bond or good faith deposit that would ensure the
contract performance and completion.
• Initial Margin - The minimum amount required to initiate the trade or a transaction.
• Maintenance Margin - The minimum amount required at all times in order to sustain
a market position.
• Margin Call - When the margin level is lower than the maintenance margin.

Be aware that a securities margin is different than that of a futures margin.

Users of Futures Contracts

In a similar nature to forward contracts, future contracts are purchased by speculators and
hedgers.

Speculators

The majority of futures contract are purchased by speculators who are betting on the
direction of an underlying asset. Speculators may either be individuals or a firm.

• Individual Traders - With the emergence of electronic trading, more and more
individuals are now managing their own investment portfolios. The speed and ease
of buying and selling stocks have given individual traders greater access to markets
that were once reserved for institutions.
• Trading Firms - Trading firms provide lending and capital resources to traders who
are buying and selling securities. By providing capital, research and strategies, these
firms charge a fee in a form of a commission.
• Portfolio Managers - Portfolio Managers who are responsible for managing
people's funds, either in a mutual fund, exchange traded fund or hedge fund, may
engage in futures speculation or hedging. The goal of the portfolio managers is to
decrease their correlation of a certain asset class to a negative or positive market
downturn, depending on their investment philosophy. This is where future contracts
would come in handy.
• Markets Makers - Market makers are trading firms whose goal is to provide liquidity
to the markets. Market makers help facilitate large transactions and typically make a
profit on the spread, known as the small difference between the bid and the ask of
transactions.