Futures Trading Basics: How Futures Contracts Work
A futures contract is an agreement to buy or sell a specific asset at a set price on a set date in the future. Unlike an option, a futures contract is an obligation for both sides, not just a right. Futures are traded on regulated exchanges and cover assets such as stock indexes, commodities like oil and gold, currencies and interest rates.
Why do futures exist?
Futures were originally created so producers and buyers could lock in prices ahead of time. A farmer, for example, could agree today on the price they'll receive for a crop at harvest. Today, futures are used by two main groups:
- Hedgers, who use futures to protect against price changes in something they produce, buy or own.
- Speculators, including traders, who aim to profit from price movements without wanting the physical asset.
The key parts of a futures contract
Every futures contract has standardised terms set by the exchange:
- Underlying asset: what the contract is based on, such as an equity index, crude oil or gold.
- Contract size: how much of the asset one contract represents.
- Tick size and tick value: the smallest price move and how much money each move is worth.
- Expiration (or delivery) date: when the contract ends.
- Settlement: whether the contract settles in cash or by physical delivery. Most traders close or roll their positions before expiration.
These details differ for every contract, so always check the exchange's specifications before trading one.
How do margin and leverage work in futures?
You don't pay the full value of a futures contract upfront. Instead, you deposit margin, a good-faith amount that's a fraction of the contract's value:
- Initial margin: the amount required to open a position.
- Maintenance margin: the minimum you must keep in your account while the position is open.
Because you control a large position with a small deposit, futures are highly leveraged. A small price move can create a large gain or loss relative to your margin.
Futures accounts are also marked to market daily: gains and losses are settled in your account at the end of each trading day. If losses push your balance below the maintenance margin, you may get a margin call and need to add money, or your broker may close your position.
Long and short in futures
- Going long: buying a futures contract because you expect the price to rise.
- Going short: selling a futures contract because you expect the price to fall.
In futures, going short is as straightforward as going long, which is one reason traders use them.
A simple example
Imagine a futures contract where each one-point move is worth $50. You buy one contract, and the price rises 10 points. Your gain is 10 × $50 = $500, before costs. If the price had fallen 10 points instead, you would have lost $500.
The same leverage that makes gains feel large makes losses arrive fast. That's why position size and a predefined exit are essential.
The risks beginners should understand
- Leverage: losses can exceed your initial margin.
- Margin calls: a fast move against you can force you to add money or exit at a bad time.
- Volatility and gaps: prices can jump overnight or on news, past your stop-loss.
- Expiration: you need to manage or roll positions before contracts expire.
- Emotional pressure: fast-moving, leveraged markets make fear and greed louder.
Futures vs options vs stocks
- Stocks: you hold ownership in a company, pay the full share price upfront (unless trading on margin), use low leverage, and there's no expiry.
- Options: you hold a right to buy or sell, pay a premium upfront, get high leverage, and the contract expires.
- Futures: you hold an obligation to buy or sell, deposit margin upfront, get high leverage, and the contract expires.
New to these markets? Start with Trading Basics and Options Trading Basics.
Key takeaways
- A futures contract is an obligation to buy or sell an asset at a set price on a set date.
- Futures are standardised, exchange-traded and highly leveraged.
- Margin is a deposit, not the cost of the contract, and losses can exceed it.
- With high leverage, strict risk limits and emotional control are essential.
Frequently asked questions
Can you lose more than you invest in futures?
Yes. Because futures are leveraged, losses can exceed the margin you deposited.
Do I have to take delivery of the asset?
Most traders close or roll their positions before expiration, so they never take delivery. Some contracts settle in cash.
Are futures good for beginners?
Futures move fast and use high leverage, so beginners should learn the contract details, use small position sizes, and have clear risk rules before trading them.
This article is for educational purposes only and isn't financial advice. Futures trading involves substantial risk of loss.