Futures trading is a contract to buy or sell something at a set price on a set date in the future

When you trade futures, you are not buying the thing itself right now. Instead, you are making a binding agreement with someone else: you agree to exchange a specific amount of something — wheat, oil, a stock index, a currency — at a price you both decide today, but the actual exchange happens months from now. The person on the other side of the contract is betting the price will go down; you are betting it will go up. One of you will be right, and one will lose money.

The contract itself is standardized. A crude oil futures contract always means 1,000 barrels. A corn futures contract always means 5,000 bushels. You cannot negotiate the amount or the delivery date — those are fixed by the exchange where the contract trades. What you negotiate is only the price per unit.

Futures contracts trade on exchanges like the Chicago Mercantile Exchange (CME), the Intercontinental Exchange (ICE), and others. These are not stock markets. They are separate marketplaces with their own rules, trading hours, and settlement procedures. Most futures contracts never result in physical delivery; traders close out their positions before the contract expires by selling or buying an offsetting contract.

Key Takeaways

  • A futures contract locks in a price today for delivery of a commodity or financial instrument months in the future, and both sides are legally obligated to complete the trade.
  • You do not own the underlying asset when you buy a futures contract — you own only the right and obligation to buy or sell it at the agreed price on the expiration date.
  • Futures contracts are standardized by the exchange, meaning the quantity, quality, and delivery date are fixed; only the price is negotiated between buyer and seller.
  • Most futures traders close their positions before expiration by taking the opposite trade, so physical delivery rarely occurs.
  • Futures trading uses leverage, meaning you control a large contract value with a small amount of money upfront, which amplifies both gains and losses.

How leverage works in futures trading

Futures contracts require you to put down only a fraction of the contract's total value upfront. This fraction is called the margin requirement, and it varies by contract type and exchange. For example, you might control $100,000 worth of crude oil with only $5,000 in your account. That $5,000 is your margin.

Leverage cuts both ways. If the price moves 5 percent in your favor, your $5,000 margin doubles. If the price moves 5 percent against you, your $5,000 margin is wiped out — and you may owe money beyond that. The exchange will force you to close the position or deposit more money if your account balance falls below the maintenance margin level. This forced closing is called a margin call.

Because of leverage, futures trading can produce large profits or large losses on small price movements. A trader with $10,000 can control contracts worth $200,000 or more. That same trader can also lose more than $10,000 if prices move sharply against them.

The difference between futures and owning the actual commodity

When you buy shares of a stock, you own a piece of the company. When you buy a futures contract, you own nothing except the right to buy or sell at a set price. You do not receive dividends, voting rights, or any benefit of ownership. You have only the obligation to complete the trade when the contract expires.

If you hold a wheat futures contract until expiration, you must either take delivery of 5,000 bushels of wheat or sell the contract to someone else before the deadline. Most traders never take physical delivery because they are not in the business of storing grain. Instead, they close the position by selling an identical contract, locking in whatever profit or loss has accumulated.

Commodity producers and users — farmers, oil refineries, food manufacturers — use futures to lock in prices and protect against price swings. Traders and speculators use futures to bet on price direction without owning the underlying asset. Both groups trade the same contracts on the same exchanges.

What happens when a futures contract expires

Every futures contract has an expiration date, also called the settlement date. For agricultural contracts, this is often tied to the harvest season. For financial contracts like stock index futures, it is typically the third Friday of the contract month. On or before that date, you must either close your position or prepare to settle.

Settlement can happen two ways. Physical delivery means you actually receive the commodity (or deliver it if you sold the contract). Cash settlement means the exchange calculates the difference between your contract price and the final market price, and credits or debits your account. Most financial futures — stock index futures, currency futures, interest rate futures — settle in cash. Most agricultural and energy futures offer physical delivery as an option, though few traders exercise it.

If you do not close your position before expiration, the exchange will settle it automatically according to the contract specifications. You cannot simply hold a futures contract indefinitely the way you can hold a stock.

Why people trade futures instead of buying the actual thing

Futures allow you to bet on price direction without the cost and complexity of owning the underlying asset. You do not need to store 5,000 bushels of wheat or rent a tank to hold crude oil. You do not need to own $100,000 worth of a stock index to profit from its price movement. Futures give you that exposure with a small upfront deposit.

Futures also trade nearly 24 hours a day on global exchanges, so you can trade at times when the underlying market is closed. You can short a futures contract — bet that the price will fall — just as easily as you can go long. Shorting a stock requires borrowing shares and paying interest; shorting a futures contract requires only the margin deposit.

For businesses that use commodities, futures are a tool to reduce risk. A airline can lock in jet fuel prices months in advance. A bakery can lock in wheat prices. A bank can lock in interest rates. These are not bets; they are hedges against price swings that would hurt the business.

The costs and risks of futures trading

Every time you open or close a futures position, you pay a commission to your broker. Commissions vary widely depending on the broker and the contract type, but they are a real cost that eats into your profit. You also pay the bid-ask spread — the difference between the price someone will pay and the price someone will sell at — which is another cost of entry and exit.

Leverage amplifies losses as well as gains. A 10 percent move against your position can wipe out your entire margin deposit. A 20 percent move can leave you owing money to your broker. The exchange will force you to close the position before you reach that point, but the loss is real and immediate.

Futures prices can move sharply and suddenly, especially near the expiration date or in response to news. A single bad report can move the price 5 or 10 percent in minutes. If you are holding a leveraged position, that move can eliminate your account balance before you have time to react. This is called slippage — the difference between the price you expected to exit at and the price you actually get.

Frequently Asked Questions

Can I lose more money than I put in with futures?

Yes. If you deposit $5,000 as margin and the price moves sharply against you, you can lose more than $5,000. Your broker will issue a margin call and force you to deposit more money or close the position. If you cannot meet the margin call, your broker will close the position at whatever price the market offers, and you will owe the difference.

Do I have to take delivery of the commodity when my futures contract expires?

No. You can close your position by selling an identical contract before expiration. Most traders do this. If you hold the contract until expiration and do not close it, the exchange will settle it according to the contract terms — either by cash settlement or by forcing physical delivery, depending on the contract type.

How is futures trading different from options trading?

With a futures contract, you are obligated to buy or sell at the set price. With an options contract, you have the right but not the obligation to buy or sell. Options cost less upfront but expire worthless if the price does not move in your favor. Futures require less money upfront but obligate you to complete the trade.

What is the difference between a futures contract and a forward contract?

Both lock in a price for future delivery, but futures trade on exchanges with standardized terms and daily settlement, while forwards are custom contracts between two parties. Forwards are used mostly by businesses and large institutions. Futures are open to individual traders and are more liquid — easier to buy and sell quickly.

Can I trade futures with a small account?

Yes, but the risks are higher. With leverage, a small account can control large positions. A 5 percent price move can wipe out a small account entirely. Most brokers require a minimum account balance to trade futures — often $2,000 to $5,000 — but that does not mean a small account is safe. Many traders lose their entire deposit within weeks.