Trading futures means buying or selling standardized contracts that obligate you to purchase or deliver a specific asset at a predetermined price on a set future date. These contracts cover everything from crude oil and gold to stock market indexes and interest rates, and they trade on regulated exchanges like the CME Group and IntercontinentalExchange. Most individual traders never actually take delivery of anything. They close their positions before expiration, aiming to profit from price movements along the way.
How a Futures Contract Works
A futures contract is a binding agreement between two parties. The buyer commits to purchasing the underlying asset at a specific price when the contract expires, and the seller commits to delivering it at that same price. The key word is “obligate.” Unlike stock options, which give you the right but not the requirement to buy or sell, futures lock both sides in. If you buy a crude oil futures contract at $70 per barrel and the market price rises to $80 by expiration, you still pay $70. If it drops to $60, you still pay $70.
In practice, most retail traders never deal with physical barrels of oil or bushels of wheat. Contracts can be settled in cash rather than through physical delivery, and most traders close their positions before the expiration date. You profit by selling the contract at a higher price than you paid, or by buying back a contract you initially sold at a lower price. The goal is the same as any other form of trading: buy low, sell high (or sell high first, then buy low).
What You Can Trade
Futures markets cover a wide range of asset classes. The most actively traded categories include:
- Stock index futures tied to benchmarks like the S&P 500 or Nasdaq-100
- Energy futures such as crude oil and natural gas
- Metals including gold and silver
- Agricultural commodities like corn, wheat, soybeans, coffee, and sugar
- Interest rate futures based on Treasury bonds and other debt instruments
- Currency futures for major foreign exchange pairs
Each product has its own contract specifications, including the quantity of the underlying asset, the tick size (the smallest price increment), and the expiration schedule. For example, one standard gold futures contract represents 100 troy ounces, so even a small price move translates into a meaningful dollar amount.
Margin and Leverage
You do not need to put up the full value of a futures contract to open a trade. Instead, you deposit what’s called initial margin, sometimes referred to as a performance bond. This is a good-faith deposit ensuring you can meet your obligations. Initial margin requirements typically range from 2% to 12% of the contract’s notional value, depending on the product.
That percentage is what creates leverage. If a contract controls $100,000 worth of an asset and the initial margin is 5%, you only need $5,000 to open the position. A 2% move in the underlying asset translates to a $2,000 gain or loss on your $5,000 deposit, which is a 40% swing. Leverage amplifies gains and losses equally, which is why futures trading carries substantially more risk than buying stocks outright.
Once you hold a position, your broker requires you to keep a minimum balance called the maintenance margin. If the market moves against you and your account equity drops below this threshold, you’ll receive a margin call. That means you must deposit additional funds to bring your account back up to the initial margin level. If you can’t meet the margin call, your broker can close your position to limit further losses.
Daily Mark-to-Market Settlement
Futures accounts are settled at the end of every trading day through a process called mark-to-market. Your broker recalculates the value of your open positions based on that day’s closing prices, then credits gains or debits losses directly to your account.
Say you bought a futures contract in the morning and the price rose by the close. The profit is added to your margin balance that same day. If the price fell instead, the loss is subtracted immediately. This daily settling process is how margin calls get triggered. It also means you don’t wait until you close a trade to see the financial impact. Your account balance shifts every day based on market movement.
Hedging: Locking In Prices
Futures markets originally existed so that producers and buyers of physical goods could manage price risk. This use case, called hedging, remains a major part of the market today.
Consider a jewelry manufacturer that needs a large amount of gold for an order due in six months. If gold prices spike during that window, profit margins shrink or disappear. To protect against this, the company buys gold futures contracts at today’s price. If gold rises 10% over those six months, the gain on the futures contract offsets the higher cost of purchasing the physical gold. The company has effectively locked in a price, trading away the chance of benefiting from a price drop in exchange for certainty.
Farmers, airlines, food companies, and energy producers all use futures this way. An airline might buy jet fuel futures to stabilize costs. A wheat farmer might sell futures before harvest to guarantee a price for the crop. In both cases, the futures position acts as insurance against unfavorable price swings.
Speculation: Trading for Profit
Most individual traders in the futures market are speculators. They have no interest in the underlying commodity or asset. They’re simply betting on the direction of prices to make a profit.
If you believe crude oil prices will rise over the next month, you might buy oil futures contracts now and plan to sell them at a higher price before expiration. If you think the S&P 500 will fall, you can sell index futures (going short) and buy them back later at a lower price. You don’t need to own the underlying asset to sell futures first, which makes it straightforward to profit from declining markets.
Speculators actually serve an important role in the market. They provide liquidity, making it easier for hedgers to find someone on the other side of their trades. Without speculators, a farmer trying to lock in wheat prices would have a harder time finding a willing buyer for those contracts.
How Futures Differ From Stocks
When you buy a share of stock, you own a piece of a company. You can hold it indefinitely, and your maximum loss is whatever you paid. Futures work differently in several important ways.
Futures contracts expire. Every contract has a specific expiration date, and if you want to maintain a position beyond that date, you need to close the expiring contract and open a new one in a later month (a process called rolling). You can’t simply hold forever.
Leverage is built into the structure. With stocks, you need a margin account and your broker’s approval to use leverage, and even then you’re typically limited to 2:1 for overnight positions. In futures, leverage is the default. Controlling $100,000 of assets with a few thousand dollars in margin is standard.
Losses can exceed your initial deposit. If you buy $5,000 worth of stock, the worst case is losing $5,000. With futures, a sharp move against your position can create losses larger than your margin deposit, potentially leaving you owing money to your broker.
Getting Started With Futures
To trade futures, you need a brokerage account that supports futures trading. Not every stock broker offers this. You’ll go through a separate approval process where the broker evaluates your experience, financial situation, and understanding of the risks involved.
Most brokers offer simulated trading environments where you can practice with virtual money before risking real capital. Given the leverage involved, this is worth doing. Start by understanding the specific contract you want to trade: its tick value (how much each price increment is worth in dollars), its margin requirements, and its expiration cycle. A single E-mini S&P 500 futures contract, for instance, moves $12.50 for every quarter-point tick, and those ticks add up quickly in a volatile session.
Futures markets typically operate nearly around the clock on weekdays, with only brief daily maintenance breaks. This extended schedule means prices can move significantly outside of regular stock market hours, which matters if you’re holding a position overnight.