Key
Takeaways
- Standardized contracts: A futures contract is an agreement to buy or sell an asset at a set price on a future date. Exchanges fix the contract size, expiry and tick value, so every trader trades the same product.
- Margin and leverage: Traders post a fraction of the contract’s value as margin, which allows large exposure for a small deposit. Leverage magnifies both gains and losses.
- Daily settlement: Positions are marked to market every day, so profits and losses are credited or debited to the account daily, and margin calls can follow quickly.
- Two main uses: Hedgers use futures to protect against unfavorable price moves, while speculators aim to profit from them. Futures cover commodities, stock indices, currencies and interest rates.
What Is a Futures Contract?
A futures contract is a standardized
agreement to buy or sell an asset, such as oil, gold or a stock index, at a set
price on a specific future date. Traded on regulated exchanges, futures are
used to hedge price risk or speculate on price movements, usually with margin.
The asset a contract is based on is
called the underlying. Because the exchange standardizes the terms, futures can
be bought and sold easily before expiry, and most traders close their positions
without ever taking or making delivery of the underlying asset.
How Does Futures Trading Work?
Futures trading starts with choosing a
contract, then buying (going long) if you expect the price to rise, or selling
(going short) if you expect it to fall. You deposit margin, your position is
revalued every day, and you either close it before expiry or roll it into a
later contract. The four concepts below explain the mechanics.
Contract
Size and Tick Value
Each futures contract represents a fixed quantity of the
underlying asset. The tick is the smallest price movement allowed, and
the tick value is what one tick is worth in cash for one contract.
Knowing both lets you calculate profit and loss before you trade. The values
below are examples from major CME Group contracts; always check the exchange’s
current specifications.
| Contract
| Contract size
| Minimum tick
| Tick value
|
| E-mini
S&P 500
| $50 ×
index
| 0.25
points
| $12.50
|
| Micro
E-mini S&P 500
| $5 × index
| 0.25
points
| $1.25
|
| WTI crude
oil
| 1,000
barrels
| $0.01 per
barrel
| $10
|
| Gold
| 100 troy
ounces
| $0.10 per
ounce
| $10
|
| Euro FX
| 125,000
euros
| $0.00005
per euro
| $6.25
|
Margin and Leverage in Futures
Futures margin is not a down payment or a loan. It is a
performance deposit that shows you can cover potential losses. Initial
margin is the amount required to open a position, and maintenance margin
is the minimum balance you must keep while it is open. Margin is typically a
small percentage of the contract’s full value, which creates leverage: a modest
price move can produce a large gain or loss relative to the money in your
account. Exchanges and brokers can raise margin requirements, especially in
volatile markets.
Expiry
Dates and Rollover
Every futures contract has an expiry date, after which it
stops trading. Contracts are listed in set monthly or quarterly cycles, such as
March, June, September and December for many equity index futures. Some
contracts are cash-settled, meaning the difference is paid in cash at
expiry. Others are physically settled, meaning the underlying asset is
delivered. Most speculative traders avoid settlement by closing the position
beforehand or by rolling over, which means closing the expiring contract
and opening the same position in a later one. Because the two contracts can
trade at different prices, rolling can affect your results.
Mark-to-Market and Daily Settlement
At the end of each trading day, the
exchange sets a settlement price. Your account is then credited or debited by
the difference between that price and the previous day’s. This process, called mark-to-market,
means gains and losses are realized in cash every day instead of only when you
close the position. If losses push your balance below the maintenance margin,
you will receive a margin call and must add funds or reduce the position. If
you do not, the broker may close it for you.
Types of Futures Markets
Futures exist on a wide range of
underlying assets. The main categories are below.
- Commodities: These include energy, metals and agricultural products. Crude oil futures are widely used to trade or hedge energy prices, and gold futures are popular for exposure to precious metals. Explore oil futures and gold
futures.
- Indices: Index futures track the performance of a basket of stocks, such as the S&P 500 or Nasdaq-100, and let traders take a view on the broader market without buying each share. Explore index futures.
- Currencies: Currency futures are contracts on exchange rates, such as the euro against the US dollar. They are used by traders and by businesses managing foreign-exchange exposure. Explore currency futures.
- Interest rates: These contracts are based on government bonds or short-term interest rates, and reflect market expectations of future borrowing costs. Explore interest rate futures.
A Futures Trading Example
The numbers below are simplified and
for illustration only. Real margin requirements, prices and fees vary and
change over time.
Suppose a trader expects the US stock
market to rise and buys one E-mini S&P 500 contract at 5,000 points. The
contract’s value is 5,000 × $50 = $250,000. Assume the broker requires $12,000
in margin.
- If the index rises to 5,040: The trader gains 40 points × $50 = $2,000, about 17% of the margin deposited.
- If the index falls to 4,960: The trader loses 40 points × $50 = $2,000, the same amount, also about 17% of the margin. A larger fall would mean a larger loss, and a margin call could arrive before the trader chooses to exit.
Short position: a losing outcome
Now suppose a trader expects oil prices to fall and sells
one WTI crude oil contract (1,000 barrels) at $80 per barrel. Assume margin of
$7,000.
- If oil falls to $77: The trader gains $3 × 1,000 = $3,000.
- If oil rises to $83: The trader loses $3 × 1,000 = $3,000, about 43% of the margin deposited. If the price keeps rising, the loss has no fixed ceiling, because a short position’s potential loss is theoretically unlimited.
In both examples, the account is adjusted every day
through mark-to-market, so the trader would see gains or losses in cash each
day, not only at exit.
Who Trades Futures and Why?
Two broad groups trade futures:
hedgers and speculators.
- Hedgers use futures to lock in a price and reduce uncertainty. For example, an airline might buy oil futures to protect against rising fuel costs, while a farmer might sell wheat futures to secure a price before harvest. A hedger is willing to give up some potential upside in exchange for more predictable costs or revenue.
- Speculators take on price risk in the hope of profiting from it. They do not intend to buy or deliver the underlying asset, and they typically close positions before expiry. Speculators add liquidity to the market, which makes it easier for hedgers to find a counterparty, but they also carry the risk of loss if the market moves against them.
Many market participants also trade
futures to gain efficient exposure to an asset class, or to manage portfolio
risk.
Risks of Trading Futures
- Leverage risk: A small margin deposit controls a large position, so even modest price moves can cause significant losses relative to your capital.
- Losses beyond your deposit: Losses can exceed the money in your account, and you may owe your broker the shortfall.
- Margin calls: If your balance falls below maintenance margin, you may have to add funds at short notice or have positions closed, often at an unfavorable price.
- Volatility and gaps: Prices can move sharply on economic data, news or geopolitical events, and can gap past your intended exit level.
- Liquidity risk: Some contracts, especially those further from expiry or in smaller markets, may trade thinly, making it harder to enter or exit at a fair price.
- Expiry and delivery risk: Failing to close or roll a position before expiry can result in cash settlement or, for physically settled contracts, delivery obligations.
- Rollover costs: Moving into a later contract can involve price differences and extra transaction costs.
- Complexity: Contract specifications, margin rules and settlement procedures differ by market, so it is essential to understand them before trading.
Futures Trading Explained: The Bottom Line
Futures are standardized,
exchange-traded contracts that let participants hedge against price moves or
speculate on them. Their key features are fixed contract sizes, margin-based
leverage, set expiry dates and daily mark-to-market settlement. Those same
features make them efficient, but they also mean losses can build quickly and
can exceed your initial deposit. Before trading, make sure you understand the
contract specifications, how margin works and how much you can afford to risk.
If you are new to futures, practising on a demo account is a sensible way to learn how the
mechanics work without risking real capital.
Futures Trading FAQs
Can you lose more than you invest with futures?
Yes. Because futures are leveraged,
losses are based on the full value of the contract, not just the margin you
deposited. If the market moves sharply against you, your losses can exceed your
account balance, and you may be required to cover the shortfall. Using stop
orders, smaller contract sizes and careful position sizing can help manage this
risk, though they cannot remove it.
What happens when a futures contract expires?
At expiry, the contract is settled
either in cash or by physical delivery, depending on its specifications.
Cash-settled contracts, such as most stock index futures, are closed out at a
final settlement price, with the difference credited or debited to your
account. Physically settled contracts, such as many commodity futures, require
delivery of the underlying asset. Most traders close or roll their positions
before expiry to avoid settlement.
What is the difference between futures and spot prices?
The spot price is the current market
price for immediate delivery of an asset. The futures price is the price agreed
today for delivery on a future date. The two usually differ because futures
prices reflect factors such as interest rates, storage costs and market
expectations. As a contract approaches expiry, its price generally converges
toward the spot price.
Are futures good for
beginners?
Futures
can be difficult for beginners because of leverage, margin calls and daily
settlement. They are not necessarily unsuitable, but they require education and
discipline. Many newer traders start by learning contract specifications,
practising on a demo account, and using smaller contracts, such as micro
futures, to keep exposure manageable. Only trade with money you can afford to
lose.
Disclaimer: The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice. Any view expressed does not constitute a personal recommendation or solicitation to buy or sell. The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI. Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.