A futures contract is a binding agreement to buy or sell a specific commodity, currency, or financial index at a set price on a set date in the future
You are not buying the actual thing — wheat, oil, euros, or an S&P 500 index. You are buying the right and obligation to trade it at a locked-in price months from now. The contract itself is what trades on an exchange, not the underlying asset. Most futures contracts are closed out before the delivery date arrives, meaning the buyer and seller settle the price difference in cash rather than actually exchanging 50,000 bushels of corn.
Futures exist because farmers, manufacturers, airlines, and other businesses need to know what they will pay or receive for something essential. A wheat farmer can lock in a price for next harvest. An airline can lock in a fuel price for next quarter. Both sides of that contract are betting on whether the actual market price will move up or down from the locked-in price. If the market price rises, the buyer of the futures contract wins. If it falls, the seller wins.
Key Takeaways
- A futures contract locks in a price for a commodity or financial product to be traded at a specific date in the future, but most contracts are closed out before delivery through cash settlement.
- Futures are traded on regulated exchanges like the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE), not over-the-counter or through a broker's private system.
- You control a large amount of the underlying asset with a small upfront payment called margin, which means your gains and losses are magnified compared to buying the asset outright.
- The price of a futures contract moves based on supply, demand, weather, geopolitical events, and the time remaining until the contract expires.
How the mechanics work: margin, leverage, and daily settlement
When you buy a futures contract, you do not pay the full value upfront. You put down margin — typically 5 to 15 percent of the contract's total value, depending on the commodity and the exchange. This small deposit gives you control of a much larger position. If you put down $2,000 in margin to control a contract worth $20,000, you have 10-to-1 leverage. A 10 percent move in the price of the underlying asset means a 100 percent gain or loss on your margin.
Every trading day, the exchange marks your position to market. This means your account is credited or debited based on that day's price movement. If the price moves against you and your account balance falls below the maintenance margin requirement, you must deposit more money immediately or the exchange will close your position. This is called a margin call. You do not get to wait and hope the price recovers — you must act within hours.
This daily settlement and leverage system is why futures are riskier than buying a stock or bond outright. You can lose more than your initial investment. A 20 percent drop in the underlying asset can wipe out your entire margin deposit and leave you owing money to your broker.
What trades on a futures exchange and who uses it
Futures contracts exist for agricultural commodities (wheat, corn, soybeans, cattle, coffee), energy (crude oil, natural gas, gasoline), metals (gold, silver, copper), currencies (euros, yen, British pounds), and financial indexes (S&P 500, Nasdaq 100, Treasury bonds). The largest exchanges are the Chicago Mercantile Exchange (CME), the Intercontinental Exchange (ICE), and the New York Mercantile Exchange (NYMEX).
The users fall into two categories. Hedgers are businesses that actually use the commodity — an airline buying oil futures to lock in fuel costs, or a wheat farmer selling futures to lock in a harvest price. Speculators are traders betting on price direction without any intention to take delivery. They buy and sell contracts purely to profit from price swings. Most volume on futures exchanges comes from speculators, not hedgers.
You can trade futures through a futures broker or through some stock brokerages that offer a futures desk. The broker holds your margin deposit and executes your trades on the exchange. Unlike stock trading, futures trading is not insured by the Securities Investor Protection Corporation (SIPC), though the Commodity Futures Trading Commission (CFTC) regulates the exchanges and brokers.
How futures prices move and what affects them
A futures contract price reflects what traders believe the underlying asset will be worth at delivery. If a drought threatens the wheat crop, wheat futures rise because traders expect scarcity. If a hurricane shuts down oil refineries, crude oil futures spike. If the Federal Reserve signals interest rate cuts, Treasury bond futures rise because bond prices move inversely to rates. Geopolitical conflict, weather, economic data, and central bank decisions all move futures prices within seconds.
The price also changes based on how much time remains until the contract expires. A contract expiring in one month behaves differently from one expiring in six months, even if they track the same commodity. As expiration approaches, the futures price converges toward the actual spot price — the price you would pay to buy the commodity right now in the physical market. This convergence is automatic and happens regardless of what traders want.
Futures contracts have specific expiration dates set by the exchange. A crude oil contract might expire on the 20th of each month. A corn contract might expire in March, May, July, September, and December. If you hold a contract past its expiration date, you either take delivery of the physical commodity (which most traders do not want) or you close the position and roll into a later-month contract.
The difference between futures and options
Futures and options both trade on exchanges and both involve locking in prices for future dates, but they work differently. A futures contract is binding — you must buy or sell at the set price unless you close the position before expiration. An option gives you the right, but not the obligation, to buy or sell at a set price. You can walk away from an option if the price moves against you; you cannot walk away from a futures contract without closing it out and taking a loss.
Options also have a defined maximum loss — the premium you paid upfront. Futures have no defined maximum loss because of leverage and margin calls. If you buy an option and the price collapses, you lose only what you paid for the option. If you buy a futures contract and the price collapses, you can lose far more than your margin deposit.
Costs and fees you will encounter
Futures brokers charge a commission per contract, typically $10 to $50 per round trip (one buy and one sell). Some brokers charge a flat monthly fee instead. You also pay the bid-ask spread — the difference between the price at which you can buy and the price at which you can sell at any given moment. On heavily traded contracts like crude oil or the S&P 500 E-mini, the spread is tight (a few cents). On thinly traded contracts, the spread can be wide and costly.
If you hold a position overnight, you may pay or receive interest based on the margin you are using. Some brokers charge interest on borrowed margin; others credit interest if your account has excess cash. You also pay exchange fees, which are small but add up if you trade frequently. None of these costs are hidden — your broker must disclose them before you open an account.
Why futures are used for hedging and speculation
A farmer plants wheat in spring and harvests in fall. Between planting and harvest, the price could rise or fall 30 percent. The farmer can sell a futures contract at planting time, locking in a price for the harvest. If prices fall, the futures contract protects the farmer's income. If prices rise, the farmer gives up the upside but has certainty. This is hedging — using futures to reduce risk.
A speculator, by contrast, has no wheat and no intention to buy any. The speculator buys a futures contract betting that prices will rise, or sells one betting that prices will fall. If right, the speculator profits from the price move. If wrong, the speculator loses. Speculation provides liquidity to the market — it ensures there is always a buyer and seller, which helps hedgers execute their trades. Without speculators, hedgers would have a harder time finding counterparties.
Frequently Asked Questions
Can I lose more money than I put in with futures?
Yes. Because you control a large position with a small margin deposit, a large price move can wipe out your margin and leave you owing money. A margin call requires you to deposit more cash immediately or your position is closed. You are responsible for any shortfall between the sale price and your margin deposit.
What happens if I hold a futures contract until expiration?
The contract converges to the spot price and you must either take physical delivery of the commodity or close the position. Most traders close their positions days or weeks before expiration to avoid delivery. If you do not close it, the exchange will assign you delivery obligations, which can be costly and complicated for commodities like crude oil or cattle.
How is futures trading different from stock trading?
Futures use leverage and margin, meaning small price moves create large gains or losses. Stocks do not require margin calls in the same way. Futures have set expiration dates; stocks do not. Futures are regulated by the CFTC; stocks are regulated by the SEC. Futures are not SIPC-insured, but stocks held at a brokerage are.
Do I need a special account to trade futures?
Yes. You must open a futures account with a broker registered with the CFTC. Some stock brokerages offer futures trading through a separate desk or subsidiary. You will need to sign additional agreements acknowledging the risks of leverage and margin calls before you can trade.
What is the smallest futures contract I can trade?
Most exchanges offer both standard and micro contracts. A standard crude oil contract controls 1,000 barrels; a micro contract controls 100 barrels. A standard gold contract is 100 troy ounces; a micro contract is 10 ounces. Micro contracts have lower margin requirements and are used by traders with smaller accounts, but they are still leveraged and carry the same risks.