What are futures contracts?

Futures sound exotic, but the core idea is ancient and simple: agree a price now for something you’ll exchange later. A farmer and a baker agreeing the price of wheat months before harvest are, in effect, trading a future. The modern version just standardises and exchanges that agreement.

Both sides are obligated

A futures contract obligates both the buyer and the seller to transact a specific asset, at a set price, on a future date. This is the crucial contrast with options: an option buyer holds a right they can abandon, losing only the premium. Both sides of a future, by contrast, must fulfil the contract — there’s no opting out.

Going long and going short

There are two sides to every future:

• Long — you’re obligated to buy the asset at the agreed price at expiry. You profit if prices rise.
• Short — you’re obligated to sell. You profit if prices fall.

That symmetry is why futures are used both to hedge (lock in a price and remove risk) and to speculate (bet on which way a price will move).

Margin and leverage

Here’s where futures get powerful — and dangerous. You don’t pay the full contract value up front. Instead you post initial margin: a good-faith deposit worth only a fraction of the contract. This is collateral, not a part-payment, and it’s what gives futures their leverage — you control a large position with a small amount of cash. Leverage magnifies gains and losses alike, which is exactly why futures demand respect.

Marking to market

Futures are settled daily, a process called marking to market. Each day, that day’s gains or losses are credited to or debited from your margin account. If your balance falls below a maintenance level, you get a margin call — a demand to top the account back up. This daily settlement is the clever mechanism that keeps the risk of the other side defaulting very low on an exchange.

Where futures are used

Futures trade across almost every asset class: commodities like oil, gold and wheat; equity indices such as the S&P 500; interest rates and government bonds; and currencies. That breadth makes them a core tool for producers locking in prices, investors hedging risk, and speculators taking a view.