Futures Trading Basics

Futures are standardized contracts to buy or sell an underlying asset at a set price on a specified future date. They trade on organized exchanges and are used by both hedgers and speculators. Because futures are highly leveraged, it is important to understand how they work before trading them.

This page explains futures contracts in plain language: what they are, how margin works, the difference between hedging and speculation, and the main risks futures traders face.

What is a futures contract?

A futures contract specifies:

• The underlying asset (for example, crude oil, gold, an equity index or a currency pair).
• The contract size (how much of the underlying each contract represents).
• The delivery month or expiration date.
• The exchange on which it trades.

Most individual traders never take physical delivery of the underlying asset. They close their positions before expiry or roll them into a later month. The key point is that gains and losses are settled daily as the market price moves.

Margin and leverage

Futures are traded on margin. This means you put up only a fraction of the contract's value as collateral, called the initial margin. There is also a maintenance margin level you must keep in your account.

Because small price moves are applied to the full contract value, a relatively small upfront margin can control a large notional exposure. This is why futures are considered highly leveraged. Leverage amplifies both gains and losses.

If the market moves against you and your account falls below the maintenance margin, you will receive a margin call and must deposit additional funds or reduce your position.

Hedgers vs. speculators

Participants in futures markets generally fall into two categories:

• Hedgers: businesses or investors who use futures to reduce risk from price changes in the underlying asset. For example, an airline might hedge fuel costs.
• Speculators: traders who take futures positions to profit from expected price movements, without any underlying business exposure.

Both groups are important to the market. Hedgers provide a reason for the contracts to exist, while speculators provide liquidity by taking the other side of trades.

Examples of futures markets

Some of the most widely traded futures include:

• Equity index futures (such as S&P 500 futures).
• Government bond futures.
• Crude oil, natural gas and other energy futures.
• Gold, silver and other metals futures.
• Grain, livestock and other agricultural futures.
• Currencies and interest-rate futures.

Each contract has its own specifications, tick size and trading hours, which traders must learn before participating.

Risks in futures trading

Futures are not suitable for every investor. Important risks include:

• Leverage risk: even small price moves can produce large percentage losses.
• Gap risk: markets can jump on news, skipping over stop orders.
• Liquidity risk: some contracts trade thinly, making it harder to enter or exit.
• Complexity: rollover mechanics, contract specs and margin rules can be confusing.

For beginners, it is often wise to learn futures concepts using educational resources and simulated accounts before committing real capital.

Futures in a broader strategy

Some experienced traders use futures to:

• Hedge equity portfolios against market downturns.
• Implement tactical views on interest rates or commodities.
• Gain exposure to broad markets with relatively low transaction costs.

For most long-term investors, however, futures are not a core tool. Simpler vehicles like mutual funds and diversified stock or bond holdings may be more appropriate.

To see how futures compare with other instruments, you can also read about options, forex, bonds and day trading.