What does the term 'margin' mean in futures trading?

In futures trading, the term 'margin' specifically refers to the collateral that an investor must deposit with their broker to open and maintain a position in a futures contract. This margin acts as a security deposit that ensures both parties in the trading agreement fulfill their obligations.

When entering a futures contract, traders are required to provide an initial margin, which is a fraction of the total value of the contract. This margin serves several important purposes: it minimizes the risk of default and covers potential losses, as the market can be volatile, and protects the integrity of the trading system as a whole.

The concept of margin is crucial for futures trading as it allows traders to leverage their positions—meaning they can control a larger amount of commodity than what they have in cash. This leverage can amplify both potential gains and losses, making it vital for traders to manage their margin levels effectively.

The other terms, while related to trading, do not capture the specific meaning of 'margin' in the context of futures. The price difference between buy and sell orders pertains to the bid-ask spread, the amount of commodities held reflects an investor’s portfolio, and trading fees involve brokerage costs, none of which define what margin is in this trading environment.