Futures are contracts that lock in the price of an asset today for a transaction that happens on a set date in the future. In the stock market context, the most widely traded futures are tied to indexes like the S&P 500, the Nasdaq-100, and the Dow Jones Industrial Average. Rather than buying shares of individual companies, you’re essentially placing a bet on where the broader market (or a specific asset) will be at a certain point in time. Futures trade on dedicated exchanges and are a cornerstone of how institutional investors, hedgers, and speculators manage risk and pursue returns.
How a Futures Contract Works
A futures contract is a standardized legal agreement between two parties. One side agrees to buy and the other agrees to sell a specific asset at a predetermined price on a specified future date. Every detail of the contract, including the quantity, the quality of the asset (for commodities), and the expiration date, is set by the exchange. This standardization is what makes futures liquid enough to trade actively.
When you buy a futures contract (called going “long”), you profit if the price of the underlying asset rises above the price you locked in. When you sell a futures contract (going “short”), you profit if the price drops. You don’t need to own the underlying asset to sell a futures contract, which is one reason futures are popular with speculators.
Each contract represents a fixed amount of the underlying asset. For equity index futures, the contract has a multiplier that converts the index level into a dollar value. The E-mini S&P 500 future, one of the most actively traded contracts in the world, uses a $50 multiplier. If the S&P 500 index is at 5,500, one E-mini contract represents $275,000 worth of exposure to the index. Micro E-mini contracts use a $5 multiplier, making them more accessible to individual traders.
Margin and Leverage
You don’t pay the full value of a futures contract upfront. Instead, you post a deposit called “margin,” which is a fraction of the contract’s total value. This is different from margin in stock trading, where you’re borrowing money from a broker. In futures, margin is more like a performance bond ensuring you can cover potential losses.
There are two types of margin to know. Initial margin is the amount you deposit when you open a position. Maintenance margin is the minimum balance you must keep in your account while holding the position. For E-mini S&P 500 futures, maintenance margin runs roughly $24,000 to $25,000 per contract, depending on the expiration date. Since a single contract can represent over $275,000 in market exposure, you’re controlling a large position with a relatively small deposit. That leverage cuts both ways: it amplifies your gains when you’re right and your losses when you’re wrong.
If your account balance falls below the maintenance margin, you’ll receive a margin call and need to add funds immediately. If you don’t, your broker can close your position without your permission.
Daily Settlement and Mark to Market
Futures accounts don’t just sit still between when you open and close a trade. Every trading day, the exchange calculates the difference between that day’s settlement price and the prior day’s, then credits or debits your account accordingly. This process is called “mark to market.”
Say you buy one E-mini S&P 500 contract when the index is at 5,500 and the index closes at 5,520 the next day. That 20-point gain, multiplied by the $50 contract multiplier, means $1,000 gets added to your margin account. If the index instead drops 20 points, $1,000 gets pulled out. This happens every day until you close the position or the contract expires. The daily cash adjustments mean your profits and losses are realized in real time, not just when you exit the trade.
What Happens at Expiration
Stock index futures are almost always cash-settled. That means no one delivers a basket of 500 stocks to your doorstep. Instead, the exchange calculates the difference between the price you agreed to and the final settlement price, and the losing side pays the winning side in cash.
This is simpler than physical delivery, which applies to some commodity futures (like crude oil or wheat) where the actual goods change hands. For equity index futures, cash settlement makes the process seamless. Most individual traders close their positions well before expiration anyway, capturing gains or cutting losses without ever reaching the settlement date.
Futures contracts expire on a quarterly cycle, typically in March, June, September, and December, though some products offer monthly or even weekly expirations. The most actively traded contract is usually the one closest to expiration, known as the “front month.”
Who Trades Futures and Why
Futures serve two broad purposes: hedging and speculation.
- Hedgers use futures to protect existing positions. A portfolio manager holding $10 million in stocks might sell S&P 500 futures to offset potential losses during a volatile period. If the market drops, the gains on the short futures position help cushion the portfolio’s decline. The manager doesn’t have to sell any shares.
- Speculators trade futures purely for profit. They have no underlying position to protect. They’re making directional bets on where the market is headed, using leverage to amplify returns. Speculators provide liquidity that makes the market function smoothly for hedgers.
Institutional investors, hedge funds, and commodity producers make up the bulk of futures trading volume. But retail traders participate too, especially through smaller contract sizes like the Micro E-mini products that require less capital.
Types of Equity Futures
The most common stock market futures track broad indexes. The E-mini S&P 500, E-mini Nasdaq-100, and E-mini Dow are the heavyweights. These give you exposure to the overall market or a specific slice of it (tech-heavy in the Nasdaq’s case) without buying individual shares.
Single stock futures also exist. These are contracts on individual company shares rather than an index. They’re far less popular and less liquid than index futures. Regulatory oversight is split: broad-based stock index futures fall under the exclusive jurisdiction of the Commodity Futures Trading Commission (CFTC), while single stock futures are jointly regulated by both the CFTC and the Securities and Exchange Commission (SEC). Firms that trade single stock futures must be registered with both agencies.
How Futures Differ from Stocks
Buying a stock means you own a piece of a company. Buying a futures contract means you hold an agreement, not an asset. Futures expire, stocks don’t. Futures use leverage by design, while stocks require a margin account and broker approval for leveraged trading. And futures trade nearly around the clock on weekdays, which is why you’ll often hear news anchors reference “stock futures” before the regular market opens at 9:30 a.m. Eastern. Those pre-market futures prices signal how traders expect the stock market to open.
Futures profits and losses are also taxed differently. In the U.S., most regulated futures contracts receive a blended tax rate: 60% of gains are taxed at the long-term capital gains rate and 40% at the short-term rate, regardless of how long you held the position. This is often more favorable than the tax treatment for stocks held less than a year.
Risks to Understand
Leverage is the defining risk. Because you control a large position with a small margin deposit, a relatively modest move in the wrong direction can wipe out your deposit or more. Unlike stocks, where your maximum loss is capped at what you invested, futures losses can exceed the amount in your account. Your broker will pursue you for the difference.
Futures markets can also move sharply on overnight news, economic data releases, or geopolitical events. Since contracts are marked to market daily, your account can swing significantly from one morning to the next. This is why futures trading requires active monitoring and a clear risk management plan, including knowing where you’ll exit a losing trade before you enter it.