Margin and leverage

One of the big attractions—and what makes futures exciting—is leverage. Leverage is the ability to buy or sell $100,000 of a commodity with only a $5,000 security deposit so that small price changes can result in huge profits or losses. Leverage gives you the ability to either make a killing or get killed. You need to understand how this important concept works before you trade, and a thorough understanding of the powers and pitfalls of leverage is imperative to sound money management principals, which we'll discuss later in the book.

Each contract bought or sold on a futures Exchange must be backed by a good-faith deposit called margin. This is not like buying on margin in the stock market. When a stock market investor buys ...

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