Futures are standardized contracts that obligate two parties to buy or sell a specific asset at a predetermined price on a set date in the future. They trade on regulated exchanges like the Chicago Mercantile Exchange (CME) and cover everything from crude oil and wheat to stock indexes and currencies. Futures exist so that businesses can lock in prices and traders can speculate on where markets are headed.
How a Futures Contract Works
Every futures contract spells out four things: the asset being traded, the quantity, the price, and the expiration date. When you buy a futures contract, you’re agreeing to purchase that asset at the stated price when the contract expires. When you sell one, you’re agreeing to deliver it. In practice, most traders close their positions before expiration and never handle the underlying asset at all.
The price you see quoted for a futures contract reflects what the market collectively believes that asset will be worth at expiration. That price moves constantly as new information comes in, whether it’s a weather report affecting corn yields, an OPEC decision affecting oil supply, or an employment report affecting stock indexes. Your profit or loss is the difference between the price when you entered the contract and the price when you exit.
Physical Delivery vs. Cash Settlement
When a futures contract expires, it settles in one of two ways. Physically delivered contracts require the actual commodity to change hands. A seller of a crude oil futures contract, for example, would need to deliver 1,000 barrels of oil to the buyer at the agreed price. Any trader still holding a position after expiration will need to go through the delivery process.
Cash-settled contracts skip the physical exchange entirely. At expiry, a final settlement price is determined, and each party either receives or pays the difference in cash. No one is compelled to make or take delivery of a physical product. Most financial futures, like those tied to stock indexes, settle in cash because there’s no physical asset to hand over.
What You Can Trade
Futures markets span several broad asset classes:
- Commodities: Metals like gold, silver, and copper. Energy sources like crude oil and natural gas. Agricultural products like wheat, corn, soybeans, and coffee. Livestock and meat products like cattle and pork.
- Stock indexes: Contracts tied to benchmarks like the S&P 500, Nasdaq-100, and Dow Jones Industrial Average. These let traders bet on the direction of the broader market without buying individual stocks.
- Interest rates: Contracts on Treasury bonds and notes, which move based on expectations for Federal Reserve policy and inflation.
- Currencies: Contracts on exchange rates between major currencies like the euro, yen, and British pound versus the U.S. dollar.
Commodity futures are regulated by the Commodity Futures Trading Commission (CFTC). Security futures, which are tied to individual stocks or narrow stock indexes, are jointly regulated by the CFTC and the Securities and Exchange Commission (SEC).
Leverage and Margin Requirements
Futures trading uses leverage, which means you control a large contract value by putting up only a fraction of the total amount. That fraction is called the initial margin. Exchanges set initial margin requirements that can be as low as 3% to 12% of the contract’s full value.
Here’s a concrete example. A single crude oil futures contract on the CME covers 1,000 barrels. At $75 per barrel, that contract’s notional value is $75,000. But a trader doesn’t need $75,000 in their account. The initial margin might be around $5,000 per contract. That ratio of $5,000 controlling $75,000 worth of oil is what makes futures so leveraged.
Once you’re in a trade, you also need to meet the maintenance margin, a lower threshold your account balance can’t drop below. If the price moves against you and your account falls below this level, you’ll receive a margin call requiring you to deposit more funds. In the oil example, if maintenance margin is $4,000 and the price drops $2 per barrel, the contract loses $2,000 in value. If that pushes your balance below $4,000, you need to add money immediately or your broker may close the position. This leverage amplifies gains and losses equally, which is why futures carry more risk than simply buying an asset outright.
Who Trades Futures and Why
Two main groups drive futures markets: hedgers and speculators. They have opposite goals, and the market needs both to function.
Hedgers use futures to protect themselves against price swings in their actual business. A jewelry manufacturer worried about rising gold prices, for instance, could buy gold futures contracts to lock in today’s price for delivery six months out. If gold rises 10% in that time, the futures contract offsets the higher cost. The company gives up the chance to benefit if prices fall, but it eliminates the uncertainty. Airlines hedge jet fuel costs. Farmers hedge crop prices. International companies hedge currency exposure. For all of them, the goal is stability, not profit from trading.
Speculators, on the other hand, are trying to profit from price movements. They have no interest in the underlying commodity. A speculator who believes oil prices will rise buys oil futures, holds them as the price moves, and sells before expiration to capture the difference. Speculators take on the risk that hedgers want to shed, and in return, they provide the market with liquidity, making it easier for everyone to find a buyer or seller at a fair price. The tradeoff is that speculators are exposed to losses on both sides of the trade.
Futures for Individual Investors
Futures were once the domain of institutional traders and large commercial operations, but exchanges have introduced smaller contract sizes to make them accessible to individuals. Micro E-mini S&P 500 futures, for example, are sized at $5 times the S&P 500 Index. That’s one-tenth the size of the standard E-mini contract, bringing the notional value and margin requirements down considerably.
To trade futures, you need a brokerage account that supports futures trading, which is separate from a standard stock brokerage account. Most futures brokers require you to complete an application that assesses your experience, financial situation, and understanding of leverage. Margin requirements for individual accounts are set by your broker and may be higher than the exchange minimums.
Futures trade nearly around the clock on electronic exchanges, typically Sunday evening through Friday afternoon with brief daily maintenance breaks. This extended schedule means prices can react to global events in real time, but it also means positions can move significantly while you’re not watching. The combination of leverage, extended hours, and rapid price movement makes futures a more demanding instrument than stocks or bonds. Understanding how margin works and how quickly losses can compound is essential before placing a trade.