A futures contract is a binding agreement to buy or sell a specific asset at a set price on a set date in the future

Unlike buying a stock or a house, where you own something today, a futures contract is a promise about a transaction that will happen later. You agree now on the price, the quantity, and the delivery date. When that date arrives, the buyer must take delivery and the seller must deliver — or both sides can close the contract early by selling or buying an offsetting contract.

Futures exist for nearly everything traded in bulk: crude oil, wheat, corn, gold, Treasury bonds, stock market indexes, and currencies. The contracts are standardized — a crude oil futures contract always means 1,000 barrels, a corn contract always means 5,000 bushels — so they trade easily on exchanges. You do not negotiate the terms with another person; you trade through a futures exchange and a broker.

The core reason futures exist is price certainty. A farmer can lock in the price for next year's wheat harvest today. An airline can lock in jet fuel costs months ahead. A pension fund can lock in bond yields. Both sides reduce the risk that prices will move against them. But that same mechanism also attracts traders who have no intention of taking delivery — they buy and sell contracts purely to profit from price swings.

Key Takeaways

  • A futures contract obligates you to buy or sell a specific quantity of an asset at a predetermined price on a set date, and you can close the position before that date by trading an offsetting contract.
  • Futures are traded on exchanges through brokers, and the contracts are standardized so that thousands of identical contracts trade simultaneously.
  • You control a large amount of the underlying asset with a small upfront payment called margin, which amplifies both gains and losses.
  • Most futures traders close their positions before the delivery date and never take physical delivery of oil, grain, or metals.
  • Futures prices move constantly during market hours, and losses can exceed your initial margin if the market moves sharply against you.

How margin lets you control a large contract with a small deposit

You do not pay the full value of a futures contract upfront. Instead, you deposit margin — a fraction of the contract's value — with your broker. The broker then holds you responsible for the full contract. If you buy one crude oil futures contract (1,000 barrels), the margin requirement might be $5,000, but you control $50,000 or more of oil. This leverage is what makes futures attractive to traders and what makes them dangerous.

If the price of oil rises $5 per barrel, your contract gains $5,000 — a 100% return on your $5,000 margin. If the price falls $5 per barrel, you lose $5,000 and your margin is wiped out. If it falls further, you owe the broker money. The broker will force you to close the position or deposit more margin to cover the loss. This is called a margin call.

The margin requirement varies by contract and by broker, and it changes based on market volatility. During calm markets, margin might be 5% to 10% of the contract value. During volatile periods, exchanges raise margin requirements to reduce the risk that traders will default. You need to know your broker's requirements before you trade.

The difference between hedging and speculation

A hedger uses futures to reduce risk. A wheat farmer sells wheat futures contracts to lock in a price for the harvest. If prices fall, the futures gain offsets the loss on the actual wheat. If prices rise, the farmer gives up the extra profit but knew that going in. The farmer is not trying to make money from price swings; they are trying to make their income predictable.

A speculator buys or sells futures contracts to profit from price movement. They have no intention of taking delivery. They buy crude oil futures because they think the price will rise, or they sell wheat futures because they think the price will fall. Most futures trading volume comes from speculators, not hedgers. Speculators provide liquidity — they make it easy for hedgers to buy or sell contracts quickly — but they also add volatility because they chase trends and react to news.

As a new trader, you are almost certainly a speculator. You should understand that speculators lose money more often than they win, especially in the first year. The leverage that makes big gains possible also makes big losses possible, and the costs of trading — commissions and the bid-ask spread — work against you every time you enter or exit a position.

What happens on the delivery date and why most traders never see it

When a futures contract reaches its expiration date, the exchange settles it. For physical commodities like oil or grain, the seller must deliver the actual commodity to a designated location, and the buyer must take delivery and pay. For financial futures like stock indexes or Treasury bonds, settlement is usually cash-based — the exchange calculates the final price and credits or debits accounts accordingly.

In practice, the vast majority of futures traders close their positions days or weeks before expiration. They sell the contract they bought (or buy back the contract they sold) and walk away with a profit or loss. Only a small fraction of contracts go to delivery. If you hold a contract past expiration without closing it, your broker will force you to close it or arrange delivery, which is expensive and complicated for a retail trader.

Each contract has a specific expiration date — usually the third Friday of the contract month. A crude oil contract might expire in December, January, February, and so on. Traders typically move to the next contract month as expiration approaches, selling the near-month contract and buying the next one out. This is called rolling the position.

How futures prices differ from the price of the actual asset

The price of a futures contract is not the same as the spot price — the price you would pay to buy the asset today. A crude oil futures contract expiring in six months might trade at $75 per barrel while crude oil today costs $70. The difference reflects storage costs, interest rates, and the market's expectation of future supply and demand.

This difference, called the basis, changes over time. As the contract approaches expiration, the futures price converges toward the spot price. On the delivery date, they are the same. Understanding the basis matters because it affects whether a futures trade is actually profitable. You might buy a contract thinking the price will rise, but if the basis shrinks faster than the spot price rises, you can still lose money.

Futures prices also move based on news, economic data, and sentiment — often before the spot price moves. A report that crude inventories are higher than expected might cause crude futures to fall immediately, even though the actual oil in storage has not changed. Futures traders react to information faster than physical markets do.

The costs of trading futures and why they matter

Every time you buy or sell a futures contract, you pay a commission to your broker. Commissions vary widely — some brokers charge $5 to $15 per contract, others charge a percentage of the contract value. You also pay the bid-ask spread, the difference between the price someone will pay (bid) and the price someone will sell at (ask). On liquid contracts like crude oil or the S&P 500 index, the spread is tight — maybe a few cents. On less liquid contracts, the spread can be much wider.

These costs add up quickly. If you buy and sell ten contracts in a month, paying $10 per contract each way, you have paid $200 in commissions before you make a single dollar of profit. If the average spread on your trades is $50 per contract, you have paid another $500. You need the market to move in your favor enough to cover these costs plus generate a profit. Most retail traders underestimate how much these costs reduce their returns.

Some brokers offer lower commissions or even commission-free trading on certain contracts, but they make money elsewhere — through wider spreads, higher margin requirements, or fees for data and research. Compare the total cost, not just the commission.

Why futures are riskier than stocks or bonds

Futures are leveraged instruments. You control a large position with a small deposit, which means small price moves create large percentage gains or losses. A 2% move in the price of crude oil can wipe out your entire margin deposit. A 5% move can leave you owing money to your broker.

Futures markets also trade nearly 24 hours a day, five days a week. Prices can gap overnight or over a weekend — jump from one price to another with no trades in between — leaving you unable to close a losing position at the price you expected. If you hold a contract overnight, you are exposed to overnight risk. If you hold it over a weekend, you are exposed to weekend risk, including geopolitical events or economic data released when markets are closed.

Futures are also marked to market daily. Your broker calculates your profit or loss at the end of each trading day and either credits or debits your account. If you lose money, the margin is deducted immediately. If you do not have enough margin to cover the loss, you get a margin call and must deposit more money or close the position. This daily settlement is different from stocks, where you can hold a losing position indefinitely as long as you own the shares.

Frequently Asked Questions

Can I lose more money than I deposit in a futures account?

Yes. If the market moves sharply against you and you do not close the position, your losses can exceed your margin deposit. Your broker will issue a margin call, requiring you to deposit more money. If you do not, the broker will close your position, but if the market is moving fast, the closing price might be worse than the margin call price, leaving you with a debt to the broker.

What is the difference between a futures contract and an options contract?

A futures contract obligates you to buy or sell at the set price. An options contract gives you the right, but not the obligation, to buy or sell. With options, your maximum loss is the premium you paid upfront. With futures, your loss can be much larger. Options are generally considered less risky, but they are also more complex to price and trade.

How much money do I need to start trading futures?

Brokers typically require a minimum account balance, often $2,000 to $5,000, though some allow less. However, the margin requirement for each contract is separate. A crude oil contract might require $5,000 in margin, meaning you need at least that much in your account to hold one contract. You should have additional money beyond the minimum to cover losses and margin calls.

Do I have to take physical delivery if I hold a futures contract to expiration?

If you hold a contract past expiration, your broker will either force you to close it or arrange delivery. Most brokers will not allow retail traders to take delivery because it is expensive and complicated. You should close your position before expiration to avoid this situation.

Why do futures prices sometimes move opposite to the spot price?

Futures prices reflect expectations about future supply, demand, and storage costs, not just today's price. A report of higher-than-expected inventories might cause futures to fall even if the spot price has not moved yet. As the contract approaches expiration, futures and spot prices converge, but they can diverge significantly in the months before expiration.