Futures Contract
Last reviewed: September 30, 2026
A futures contract is a standardized, exchange-traded agreement to buy or sell a defined amount of an asset—such as a commodity, bond, currency, or stock index—at a price agreed today, for delivery or cash settlement on a future date. Both sides take on an obligation, not just an option to trade.
Reviewed September 2026
What makes a futures contract different
Standardization is the core idea. The exchange specifies contract size, deliverable grade or cash-settlement rules, tick size, and expiration schedule. That standardization lets buyers and sellers offset positions easily and lets the clearinghouse stand between parties to reduce counterparty risk through margining and daily settlement.
Unlike a forward contract negotiated privately, a listed futures contract has transparent pricing and daily mark-to-market. Gains and losses are typically credited or debited to margin accounts each business day.
How trading and margin work
You post initial margin—a performance bond, not the full notional value of the contract. As prices move, variation margin flows between accounts. If equity falls below maintenance margin, you may receive a margin call. Leverage magnifies both gains and losses; a small price move can mean a large percentage change relative to margin posted.
Most speculative positions are closed before delivery by taking an offsetting trade. Hedgers—such as producers or portfolio managers—use futures to lock in prices or manage exposure. Speculators provide liquidity but accept high risk.
Simple example
Suppose an equity-index futures contract is priced so that a one-point move equals a fixed dollar amount per contract. If you buy one contract and the index rises, your account is credited; if it falls, you are debited. You can exit by selling the same contract before expiration. You are not required to own every stock in the index; the futures position is a leveraged claim on the index level under exchange rules.
Futures vs. options and the main site futures guide
An option buyer pays a premium for the right, but not the obligation, to buy or sell. A futures position is an obligation for both long and short (until offset). That symmetry means unlimited loss potential on either side in theory, subject to exchange and broker risk controls.
This dictionary page explains the contract concept. For a fuller investor-oriented overview of futures markets, margin, and practical context, see our main Futures guide and related FAQ on what futures contracts are. Those pages are the primary CTR destinations; this entry is the definitional companion.
Risks and who they are for
Futures involve substantial risk of loss and are not appropriate for most casual investors. Leverage, daily settlement, expiration and rollover mechanics, and gap risk can produce rapid losses. Education, risk capital you can afford to lose, and clear position limits matter far more than chasing returns.
Long-term investors building wealth with stocks, bonds, and ETFs usually do not need futures. Professionals and experienced traders use them for hedging or directional views with strict risk management.
Contract specifications you should read
Each futures listing has a specification sheet: multiplier, tick size, trading hours, settlement method (physical or cash), delivery months, and position limits. Professionals live in those details because a wrong assumption about contract size or settlement can turn a small chart view into a large P&L surprise.
Index futures are typically cash-settled. Many commodity contracts can involve delivery mechanics even if most traders offset early. Currency and interest-rate futures have their own quotation conventions. Never size a position until you know the dollar value of a one-tick move.
Education path on FTMarketWatch
Start with the main futures overview if you are evaluating whether futures belong in your financial life at all. Use this dictionary entry to lock the definition. Then read margin and daily settlement and expiration and rollover before considering any practice trading in a simulator.
Most long-term investors never need a futures account. Building wealth with diversified funds, disciplined contributions, and appropriate asset allocation remains the default path on this site. Futures education here is about literacy and risk awareness, not encouragement to trade with money you cannot afford to lose.
Hedgers, speculators, and why both exist
A farmer, airline, or portfolio manager may use futures to reduce unwanted price risk. A speculator takes the other side hoping to profit from price moves. Markets need both roles for liquidity, but that economic story does not make speculation easy or advisable for beginners.
Retail traders often underestimate costs: bid-ask spreads, commissions, slippage, and the emotional toll of daily mark-to-market. Many lose money. If your financial goals are retirement compounding and steady contributions, futures are usually a distraction rather than a necessity.
Keep the vocabulary straight so news and account statements make sense—then channel effort into allocation, savings rate, and low-cost funds unless you have a professional reason to trade derivatives.