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

A futures contract is a legal agreement between two people: one agrees to buy an asset (wheat, oil, a stock index, a currency) at a specific price on a specific date. The other agrees to sell it at that same price on that same date. Neither person owns the asset yet. They are betting on what its price will be when that date arrives.

You do not need to own the thing you are selling. You do not need the money upfront to buy it. You are trading the right to buy or sell at a locked-in price. If the price moves in your direction before the contract ends, you make money. If it moves against you, you lose money.

Futures contracts trade on exchanges — the Chicago Mercantile Exchange (CME), the Intercontinental Exchange (ICE), and others. Each contract covers a standard amount: one oil contract might represent 1,000 barrels; one wheat contract might represent 5,000 bushels. You cannot buy half a contract on most exchanges.

Key Takeaways

  • A futures contract locks in a price today for something you will buy or sell on a future date, but you do not own the asset until the contract settles.
  • You control a large amount of the underlying asset with a small upfront payment called margin, which means your gains and losses are magnified.
  • Most futures contracts never result in physical delivery — traders close their positions before the expiration date and pocket the profit or loss.
  • Futures prices move based on supply, demand, weather, geopolitical events, and what other traders think the price will be, not just on the current spot price.
  • Losses in futures trading can exceed your initial investment because you are borrowing to control a larger position.

How margin lets you control a large position with a small amount of money

You do not pay the full price of the contract upfront. Instead, you put down a margin — a percentage of the contract's value. For crude oil futures, margin might be 10 to 15 percent of the contract value. For stock index futures, it might be 5 to 10 percent. The exchange holds this money as a may provide that you will settle your losses.

This is how leverage works. If you put down $2,000 in margin to control a $20,000 contract, a 10 percent move in the price means you make or lose $2,000 — a 100 percent return or loss on your margin. A 20 percent move wipes out your margin entirely and you owe money on top of it.

The exchange monitors your account daily. If the price moves against you and your margin falls below a minimum level (called the maintenance margin), the broker issues a margin call. You must deposit more money within hours or the broker closes your position automatically, locking in your loss.

What happens when a futures contract expires

Every futures contract has an expiration date — the last day you can trade it. For crude oil, it might be the 20th of the month. For corn, it might be the 15th. After that date, the contract settles.

Settlement can happen two ways. Physical delivery means you actually receive (or must deliver) the underlying asset. If you are long a crude oil contract that expires, the exchange arranges delivery of 1,000 barrels to a storage facility. You pay the full price and take possession. If you are short, you must provide 1,000 barrels.

Most traders never take delivery. Instead, they close their position before expiration by selling the contract they bought (or buying back the contract they sold). If you bought a March crude oil contract in January and the price rose, you sell that same March contract in February and pocket the difference. The exchange cancels both sides of the trade and you never touch a barrel of oil.

Why futures prices differ from the current market price

The price of a futures contract is not the same as the price of the asset right now (called the spot price). A barrel of oil might cost $80 today, but a contract to buy it three months from now might cost $82 or $78, depending on what traders expect will happen.

Traders factor in storage costs, interest rates, supply forecasts, and geopolitical risk. If a hurricane is forecast to hit oil refineries, oil futures might spike even if oil is not scarce today. If a drought threatens wheat crops, wheat futures rise before the harvest fails. Futures prices are forward-looking — they reflect what traders believe the spot price will be, plus or minus the cost of waiting.

This is why futures can move sharply on news that has nothing to do with today's supply. A central bank interest rate decision, a trade war announcement, or a weather report can shift futures prices by 5 or 10 percent in minutes.

The difference between hedging and speculation

A farmer who grows wheat uses futures to hedge — to lock in a price and reduce risk. In spring, the farmer sells a wheat futures contract for harvest time at $6 per bushel. If the price falls to $5 by harvest, the farmer still receives $6 from the futures contract and offsets the loss. If the price rises to $7, the farmer loses money on the futures contract but makes more selling the actual crop. Either way, the risk is contained.

A trader with no wheat uses futures to speculate — to bet on price movement and make a profit. The trader buys a wheat contract expecting the price to rise, sells it when it does, and keeps the difference. The trader has no wheat, no farm, and no intention of taking delivery. The only goal is to profit from price swings.

Both are legal. Hedgers reduce their risk; speculators add risk to the market. Speculators provide liquidity — they are willing to take the other side of a hedger's trade — but they also amplify price swings because they trade on leverage and emotion.

Common types of futures contracts

Commodity futures cover physical goods: crude oil, natural gas, gold, wheat, corn, soybeans, coffee, sugar, cattle. These trade on exchanges like CME and ICE. Prices are driven by weather, harvest reports, geopolitical events, and global supply and demand.

Financial futures cover indexes, currencies, and bonds. The S&P 500 E-mini contract lets you bet on the stock market without owning individual stocks. Currency futures let you bet on the dollar versus the euro. Treasury futures let you bet on interest rates. These trade on CME and other exchanges and are driven by economic data, central bank policy, and investor sentiment.

Stock index futures track broad market indexes. The E-mini S&P 500 contract is one of the most heavily traded futures in the world. A single contract controls about $150,000 worth of the S&P 500 with margin of around $10,000 to $15,000.

Risks that are specific to futures trading

Leverage is the defining feature of futures and the defining risk. You control a large position with a small amount of money, which means small price moves create large percentage gains or losses. A 5 percent move in the underlying asset can wipe out your entire margin or double it.

Margin calls can force you to close positions at the worst time. If the market gaps overnight — opens at a price far from where it closed — your margin can evaporate before you have a chance to exit. During the 2020 oil crash, some traders woke up to find they owed money on contracts they thought were hedged.

Liquidity can vanish during market stress. If you need to close a position and there are no buyers, you may have to accept a much worse price than you expected. Thinly traded contracts can have wide bid-ask spreads, meaning you lose money just entering and exiting the trade.

Futures expire. If you forget to close a position before expiration and you are not prepared to take delivery, the exchange will close it for you, often at an unfavorable price. Some traders have been forced to take physical delivery of thousands of barrels of oil or tons of wheat because they did not track their contract expiration dates.

Frequently Asked Questions

Can I lose more money than I put in?

Yes. If you put down $5,000 in margin and the price moves 20 percent against you, you lose $5,000 and owe the broker another $5,000 or more. The broker will issue a margin call and close your position if you cannot pay. You are liable for the full loss, not just your initial deposit.

Do I have to take physical delivery of the asset?

No, not if you close your position before the contract expires. Most traders sell their contract before expiration and never touch the underlying asset. If you hold the contract until expiration, you may be forced to take delivery or make a cash settlement, depending on the contract type.

How much money do I need to start futures trading?

Margin requirements vary by contract and broker, but typically range from $1,000 to $10,000 per contract. However, having enough margin to open a position is not the same as having enough money to weather a losing trade. Most professionals recommend having at least $25,000 to $50,000 in your account before trading futures.

What is the difference between futures and options?

A futures contract obligates you to buy or sell at the set price. An options contract gives you the right to buy or sell, but not the obligation. With options, your maximum loss is the premium you paid upfront. With futures, your loss can exceed your initial investment.

Can I trade futures on my regular brokerage account?

No. Futures require a separate account with a futures broker or a broker that offers a futures division. You must sign additional agreements acknowledging the risks. Some brokers have minimum account sizes or experience requirements before they will let you trade futures.