Futures are contracts 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 a specific thing (wheat, oil, a stock index, a currency) at a price they lock in today, and the other agrees to sell it at that same price on a date months away. You do not own the thing yet. You own the right and the obligation to make that trade happen later. The price is fixed now, but the actual delivery or settlement happens later — that is where the word "futures" comes from.

Most futures traders never actually take delivery of what they bought. Instead, they close the contract before the delivery date by selling it to someone else, or they let it expire and walk away. The real money moves because the price of the contract changes every day as traders buy and sell it. If you bought a contract when wheat was $5 a bushel and wheat rises to $6, your contract is now worth more, and you can sell it for a profit. If wheat falls to $4, you lose money.

Futures exist for hundreds of commodities and financial instruments: crude oil, natural gas, corn, soybeans, gold, silver, stock indexes like the S&P 500, Treasury bonds, foreign currencies, and more. Each one trades on a specific exchange — the Chicago Mercantile Exchange (CME) handles most U.S. futures — and each contract has a standard size (one oil contract is 1,000 barrels; one corn contract is 5,000 bushels) and a standard expiration date.

Key Takeaways

  • A futures contract locks in a price today for something you will buy or sell on a specific date months away, but most traders close the contract before that date arrives.
  • You control a large amount of the underlying commodity or asset with a small amount of money upfront, called margin, which means your gains and losses are magnified.
  • Futures prices move every trading day, and you can profit if the price goes up (if you bought) or down (if you sold short), or lose money in either direction.
  • Futures trading is faster and more volatile than buying stocks or bonds, and most individual traders lose money because prices move against them or they run out of margin.

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

You do not have to pay the full value of a futures contract upfront. Instead, you put down a margin — a percentage of the contract's value, typically 5 to 15 percent depending on the commodity and the broker. If a crude oil contract is worth $60,000 and the margin requirement is 10 percent, you put down $6,000 to control the entire contract.

This leverage works both ways. If the price of oil rises 10 percent, your $6,000 turns into $12,000 — you doubled your money. But if oil falls 10 percent, your $6,000 becomes zero and you owe the broker money. Brokers watch your account balance constantly and will force you to close your position or add more money if your losses eat into your margin. This is called a margin call. If you cannot pay, your broker closes the trade for you, locking in your loss.

Leverage is why futures attract traders who want big moves on small capital. It is also why most individual futures traders lose money — the same leverage that doubles gains also doubles losses, and prices move faster than most people expect.

Prices change every day and you can profit from both rises and falls

Futures contracts trade during set hours on their exchange. During those hours, the price moves constantly as traders buy and sell. At the end of each day, your broker marks your position to market — they calculate what your contract is worth at the closing price and add or subtract that amount from your account. If you bought a contract at $100 and it closes at $102, you gain $2 per unit (multiplied by the contract size). If it closes at $98, you lose $2 per unit.

You can profit whether prices go up or down. If you think oil will rise, you buy a contract (called going long). If you think oil will fall, you sell a contract you do not own (called going short or shorting). When you short, you are betting the price will drop so you can buy it back cheaper later and keep the difference. Both long and short positions are settled the same way — by closing the trade before expiration or letting it expire.

The catch is that prices move fast and can move against you quickly. A 2 percent move in the underlying commodity can wipe out your entire margin deposit. Many traders set stop-loss orders — instructions to close the trade automatically if the price hits a certain level — to limit how much they can lose on a single trade.

Expiration dates force you to close or roll the contract

Every futures contract has an expiration date. For crude oil, contracts expire on the 20th of the month before delivery. For corn, they expire in March, May, July, September, and December. As the expiration date approaches, the contract becomes less liquid — fewer traders are willing to buy or sell it — and the price can become harder to predict.

Before expiration, you have three choices: close the trade by selling the contract (if you bought) or buying it back (if you sold short); roll the contract by closing the near-term contract and opening a new one with a later expiration date; or let it expire and settle in cash or physical delivery. Most individual traders close or roll before expiration because they do not want to take or make physical delivery.

Futures are different from stocks and bonds in speed and risk

Stocks represent ownership in a company. Bonds are loans you make to a company or government. Futures are neither — they are contracts on prices. This difference matters because futures move faster, trade on margin, and expire. You can hold a stock forever; a futures contract expires and forces a decision.

Stocks and bonds also trade during regular market hours and settle over two business days. Most futures trade nearly 24 hours a day (with a brief close for maintenance) and settle daily. This means price moves happen faster and you can lose your margin deposit in hours, not weeks.

Futures also have no intrinsic value — they are worth only what the next buyer will pay. Stocks have earnings and dividends; bonds have interest payments. A futures contract is purely a bet on price direction. This makes futures attractive to traders who want leverage and speed, and risky for traders who do not understand how fast things can move.

Who trades futures and why

Futures traders fall into two groups: hedgers and speculators. A hedger is someone who actually uses the commodity — a bakery that buys wheat futures to lock in the price of flour, or an airline that buys oil futures to protect against rising fuel costs. A speculator is someone betting on price direction to make a profit, with no intention of using the commodity.

Most individual traders are speculators. They trade futures because the leverage lets them control a large position with small capital, and because prices move enough to create profit opportunities. But leverage cuts both ways, and most individual speculators lose money over time because they underestimate how fast prices move, overestimate their ability to predict direction, or run out of margin before the trade turns in their favor.

Professional traders and large institutions also trade futures, but they have more capital, better tools, and years of experience managing risk. The playing field is not level between an individual trader and a professional market maker.

How to start learning about futures trading

If you want to understand futures beyond the basics, start by learning the specific contract you are interested in — its size, expiration dates, margin requirements, and typical daily price moves. Each exchange publishes this information for free on their website. The CME has educational resources for beginners, and most brokers offer paper trading (simulated trading with fake money) so you can practice without risking real capital.

Read about risk management before you trade real money. Understand how much you can afford to lose on a single trade, how margin calls work, and what a stop-loss order does. Many traders lose money because they did not have a plan for when to exit a losing trade.

Consider starting small — one contract, not five — and tracking your trades in a journal so you can see what works and what does not. Futures are not a way to get rich fast; they are a tool for managing price risk or speculating on price direction, and they require discipline and planning to use without losing money.

Frequently Asked Questions

Do I have to take physical delivery of what I buy in a futures contract?

No. Most individual traders close the contract before expiration by selling it (if they bought) or buying it back (if they sold short). Physical delivery happens only if you hold the contract until expiration and do not close it, and even then, many contracts settle in cash rather than physical goods. Your broker will warn you as expiration approaches.

Can I lose more money than I put in?

Yes. If you put down $6,000 in margin and the price moves against you sharply, your loss can exceed $6,000. Your broker will issue a margin call and force you to close the trade or add money to your account. In fast-moving markets, you can lose your entire deposit and owe money to the broker.

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

A futures contract is an obligation — you must buy or sell at the set price on the set date. An options contract is a right — you can choose to buy or sell, but you do not have to. Options cost less upfront but expire faster and lose value as the expiration date approaches. Both use leverage and both can result in total loss of your deposit.

How much money do I need to start trading futures?

Brokers typically require a minimum account balance of $500 to $2,000 to open a futures account, but this is not the same as the margin requirement for a single contract. If a contract requires $6,000 in margin, you need at least $6,000 in your account to open that trade. Many traders start with more to cushion against margin calls.

Why do most individual futures traders lose money?

Leverage magnifies both gains and losses, prices move faster than most people expect, and traders often do not have a plan for exiting losing trades. Professional traders have better information, faster execution, and years of experience. Individual traders are competing against them with less capital and less experience, which is why the odds are stacked against beginners.