When opening a new position in an instrument such as futures, options, or margin accounts, the investor is required to deposit a minimum amount of collateral with a broker or exchange. The initial margin's purpose is to ensure that the investor has enough funds to cover any potential losses that may occur as a result of adverse market movements.
The amount of initial margin required is determined by the type of instrument being traded and the risk involved. Higher-risk instruments generally necessitate a larger initial margin, whereas lower-risk instruments may necessitate a smaller initial margin.
The initial margin is typically expressed as a percentage of the notional value of the financial instrument being traded. For example, if the notional value of a futures contract is $100,000 and the initial margin requirement is 5%, the investor must deposit $5,000 with their broker or exchange as initial margin.