FT MarketWatch

What Are Futures Contracts?

Written by Greg, founder of FTMarketWatch — a former licensed commodities trader, self-directed investor since. Not a licensed financial advisor.

Short answer: A futures contract is a standardized agreement, traded on an exchange, to buy or sell an asset — such as a commodity, stock index, or currency — at a set price on a specific future date. They're used both for hedging by producers and institutions, and for speculation by traders.

Detailed Explanation

Unlike buying a stock outright, a futures contract obligates both parties to complete the transaction at the agreed price when the contract expires, unless the position is closed out beforehand. Contracts are standardized (fixed size, expiration dates) and traded on regulated exchanges.

Futures are heavily used by producers and businesses to hedge against price swings — for example, a farmer locking in a price for a future harvest. Speculative traders also use futures to bet on price direction, often with significant leverage through margin, which is what makes them high-risk for beginners.

Because futures positions are marked to market daily and typically use substantial leverage, losses can accumulate quickly and may exceed the initial margin deposited. They're generally considered an advanced instrument, not a beginner starting point.

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