A futures contract is an agreement to buy or sell a specific amount of something, such as crude oil, gold, wheat, or a stock index, at a price agreed today, for a transaction on a set date in the future. The terms are standardized by an exchange, so every contract of the same type is identical. That standardization is what lets thousands of people trade the same contract with each other every second.
Futures can sound exotic, but the idea is old and practical. A farmer who wants to lock in a price for next fall's harvest and a cereal maker who wants to lock in its cost of grain both benefit from agreeing on a price today. Futures markets grew out of exactly that need.
The basic idea in one example
Imagine it is spring. A wheat farmer worries prices will fall before harvest. A bakery worries prices will rise. Through a futures exchange, the farmer can sell a wheat futures contract and the bakery can buy one, each at today's agreed price for a contract that expires after the harvest.
If wheat prices drop by harvest time, the farmer's crop is worth less, but the futures position gains roughly the same amount, offsetting the loss. If prices rise, the bakery pays more for wheat, but its futures position gains. Each side traded away uncertainty. That is called hedging.
In practice, the farmer and the bakery never meet. Each trades with the market through a broker, and a central clearinghouse stands between every buyer and seller.
What every futures contract specifies
Because the exchange writes the terms, you always know exactly what you are trading. Every contract defines:
- The underlying asset. What the contract is based on: a commodity, a currency, an interest rate, or a stock index.
- Contract size. How much of the asset one contract represents, such as 1,000 barrels of crude oil or $50 times the S&P 500 index for the E-mini S&P 500.
- Tick size and tick value. The smallest price move allowed and what that move is worth in dollars.
- Expiration. The month and last trading day of the contract.
- Settlement method. Whether the contract ends with physical delivery or a cash payment.
We walk through each of these in How futures contracts work.
Who trades futures, and why
The CFTC notes that most futures market participants are commercial or institutional users who hedge price risk. The other major group is speculators.
| Participant | Goal | Example |
|---|---|---|
| Hedgers | Reduce the risk of price changes in their business | An airline locking in jet fuel costs; a grain elevator protecting inventory value |
| Speculators | Profit from price changes they expect | A trader who thinks gold will rise buys a gold contract |
Speculators are not villains in this story. By taking the other side of hedgers' trades, they add liquidity, which makes it easier and cheaper for everyone to get in and out of positions. But speculation is where most individual traders get hurt, and it is important to understand why before you open an account.
How money moves: margin and daily settlement
When you buy a share of stock, you pay for it. When you buy a futures contract, you don't pay the full value. Instead, you post margin, a good-faith deposit that is usually a small percentage of the contract's total value. CME Group describes typical margins as roughly 3 to 12 percent of notional value.
Every trading day, the exchange sets an official settlement price, and your account is adjusted for that day's gain or loss. This is called mark-to-market. As CME Group puts it, losers pay winners every day. If losses drop your account below the required level, you must add money or your position can be closed.
Margin creates leverage: a small deposit controls a large position. Leverage magnifies gains, and it magnifies losses just as much. Read Margin and leverage explained before you go further.
How a futures trade ends
There are three ways out of a futures position:
- Offset. You make the opposite trade before expiration: if you bought one contract, you sell one. This is how the vast majority of positions end.
- Roll. You close the expiring contract and open the same position in a later month. See Expiration and rollover.
- Settlement. You hold to expiration and the contract settles in cash or by physical delivery, depending on its terms.
What you can trade with futures
Futures cover a wide range of markets. Major U.S. exchanges list contracts on:
- Stock indexes such as the S&P 500, Nasdaq-100, and Dow
- Energy such as crude oil and natural gas
- Metals such as gold, silver, and copper
- Agriculture such as corn, soybeans, wheat, and cattle
- Interest rates such as Treasury notes and bonds
- Currencies such as the euro, yen, and British pound
Many of these now come in smaller "micro" sizes, which lower the dollar risk per contract. See Micro futures explained.
An honest word before you start
Futures are a legitimate tool used by farmers, airlines, banks, and pension funds. They are also one of the riskiest ways an individual can speculate. The CFTC describes speculating in futures and options as volatile, complex, and risky, rarely suitable for retail customers, and warns that many individuals lose all of their money and can be required to pay more than they originally invested.
Learn first, risk later
Before trading real money, understand the contract you're trading, know exactly what one tick costs you, write down how much you can afford to lose, and practice in a simulated account. Our trading plan guide and risk management guide are good next steps.
FuturesSignal.com is an education site. We explain how markets work; we don't tell anyone what to buy or sell.
Before you trade
Futures are leveraged. A small price move can produce a large gain or loss, and losses can exceed the money in your account. This article is general education, not a recommendation to buy or sell any contract.
- Practice in a simulated (paper) account before using real money.
- Decide your maximum loss per trade before you enter, and size positions to it.
- Confirm current contract specifications and margin requirements with the exchange and your broker.
Common questions
Do I have to take delivery of oil or corn if I trade futures?
Most traders close their positions before expiration, so delivery never happens. Some contracts are cash-settled and have no physical delivery at all. If you hold a physically delivered contract too long, though, your broker will usually close it for you or require you to exit; check your broker's rules.
Can I lose more than I put into a futures account?
Yes. Because futures are leveraged and settled daily, losses can exceed the money you deposited, and you can be required to pay the difference. The CFTC warns that many individuals lose all of their money trading futures.
Are futures the same as stocks?
No. A share of stock is ownership in a company. A futures contract is an agreement about a future transaction, with an expiration date and margin requirements. See our comparison of futures, stocks, and options.
Sources
- Futures Market Basics — U.S. Commodity Futures Trading Commission. www.cftc.gov/LearnAndProtect/AdvisoriesAndArticles/FuturesMarketBasics/index.htm
- Introduction to Futures — CME Group Education. www.cmegroup.com/education/courses/introduction-to-futures.html
- Mark-to-Market — CME Group Education. www.cmegroup.com/education/courses/introduction-to-futures/mark-to-market.html
- Investor Education & Resources — National Futures Association. www.nfa.futures.org/investors/investor-resources/index.html
Last reviewed October 17, 2026. Educational content only; not investment advice. Contract specifications and margins change, so confirm current figures with the exchange and your broker. See our risk disclosure.
