Futures Contract
A futures contract is a standardised, exchange-traded agreement to buy or sell an asset at a set price on a future date.
Futures began as a way for farmers and food companies to fix prices months ahead. Today they are traded on everything from wheat and oil to stock indices, interest rates and Bitcoin. A futures contract is a standardised agreement to buy or sell at a set price on a future date — but most traders never deliver or receive anything. They trade the price, post a margin deposit, and have gains and losses settled into their account every day. This entry explains how that works and why the leverage involved makes risk control essential.
- Category
- Derivatives
- Reading time
- 6 min
- Also called
- Futures, Future, Futures trading
- Updated
A futures contract in plain words
Imagine a wheat farmer who will harvest in autumn and fears prices will fall. Futures let the farmer agree a price today for wheat sold later, removing that uncertainty.1 A miller who fears rising prices can do the opposite.
Exchanges standardise everything except the price — the contract size, delivery months, last trading day, delivery locations and acceptable grades — so many people can trade the same contract.1 Most futures are closed by an offsetting trade rather than delivery.1
How a futures trade works, step by step
Check the contract specification
Contract size, tick value, trading hours and expiry differ for every product. They determine how much each price move is worth.
Trade with the clearing house
Once the trade is matched, the clearing house steps in as the counterparty to both sides.1 See Central Counterparty.
Daily mark to market
Each day the position is valued at the settlement price; profits are added to your account and losses taken out.1
Meet margin calls
If your account falls below maintenance margin, you must deposit enough to bring it back up to the initial margin level.1
Close or roll before expiry
Offset the position by trading the opposite side, or roll it into a later contract month, before the last trading day.
Worked examples
Example 1 — The farmer’s hedge
HedgeA farmer expects 50,000 bushels of wheat. Each contract covers 5,000 bushels. In spring the December contract trades at $3.50; the farmer sells 10 contracts. At harvest the price is $3.00.
| Futures gain: (3.50 − 3.00) × 50,000 | +$25,000 |
| Lower price on the physical crop | −$25,000 vs. spring price |
| Effective price | ≈ $3.50 per bushel |
This mirrors the CFTC’s own example.1 The futures gain offset the lower crop price, so the farmer locked in roughly the spring price — ignoring local price differences and costs.
Example 2 — A speculator and leverage
LeverageA trader buys one stock-index future worth $100,000, posting $6,000 of initial margin.2 The index falls 4%.
| Loss on the contract | 4% × $100,000 = −$4,000 |
| As % of margin posted | −67% |
A 4% market move wiped out two-thirds of the deposit. Futures losses are not limited to the margin you posted. See Leverage.
Example 3 — A margin call
Margin callInitial margin is $6,000 and maintenance $5,000. After two losing days the account shows $4,800.
| Below maintenance? | Yes — $4,800 < $5,000 |
| Required deposit | Back to $6,000 initial margin: $1,200 |
The call restores the account to the initial margin, not just to maintenance.1 Failing to meet it can lead the broker to close the position.
A futures account marked to market
Futures vs. other ways to trade
| Aspect | Futures | Buying shares | Forward contract |
|---|---|---|---|
| Where traded | Exchange, standardised1 | Exchange | Privately negotiated |
| Upfront cost | Margin, typically 2–10% of value1 | Full price (or margin loan) | Often none |
| Counterparty | Clearing house1 | Exchange settlement | The other party |
| Exit early | Offset on the exchange1 | Sell | Hard; cannot simply be offset1 |
| Expiry | Yes | No | Yes |
Who uses futures, and why
Hedgers
Producers and consumers lock in prices to run their businesses with more certainty.1 See Hedging.
Speculators
Traders take positions on price direction with capital-efficient margin, adding liquidity.
Portfolio managers
Index and bond futures adjust market exposure quickly without trading every underlying security.
Price discovery
Futures prices give the market’s view of future prices for commodities, rates and indices.
Advantages and disadvantages
Advantages
- Standardised and exchange-traded, with central clearing.
- Capital-efficient: margin is a fraction of contract value.
- Easy to go long or short.
- Deep liquidity in major contracts, often trading nearly around the clock.
Disadvantages
- High leverage: small moves can produce large losses relative to margin.
- Losses are settled daily and can require extra deposits at short notice.
- Contracts expire and must be rolled, which has costs.
- Contract sizes can be large for small accounts; check micro versions where available.
Going deeper
Read as far as you need. Each level builds on the one before it.
You are not buying the barrel
Beginner
Almost all futures traders close positions before delivery; most futures contracts by volume are offset rather than delivered.1 Still, know the last trading day and any delivery rules for your contract.
Contango, backwardation and rolling
Intermediate
Futures for different months trade at different prices. When later months are higher, the market is in contango; when they are lower, it is in backwardation. Rolling a long position in contango means selling the cheaper near month and buying the dearer later one, which drags on returns over time. See Contango and Backwardation.
Why futures converge on the spot price
Advanced
The possibility of delivery ties the futures price to the cash market: near expiry, any gap would invite arbitrage. The delivery provision exists to ensure that convergence.1 Cash-settled futures, such as many index contracts, achieve the same by settling against the underlying price. See Basis.
Perpetual futures, common in crypto, never expire; a funding rate paid between longs and shorts keeps them near the spot price instead. See Perpetual Futures.
Common mistakes
Sizing by margin, not by contract value
Risk depends on the full value controlled. Size positions from your stop and the tick value. See Position Sizing.
Ignoring expiry
Holding into the last trading day can bring delivery obligations or forced closure.
Keeping only the minimum margin
An account at minimum margin can be called after a single bad day.
Forgetting overnight sessions
Many futures trade almost 24 hours; prices can move sharply while you sleep.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- A futures contract is a standardised exchange-traded agreement to buy or sell at a set price on a future date.
- Margin is a performance bond, typically 2–10% of contract value.
- Positions are marked to market daily; margin calls restore the initial margin.
- Most futures are closed by offsetting trades, not delivery.
- Leverage makes losses fast — size from contract value and stop distance.
Frequently asked questions
Can I lose more than my margin in futures?
Do I have to take delivery?
Why are futures prices different from the spot price?
Further learning
- Margin
How futures margin differs from stock margin.
- Leverage
Why small moves matter so much in futures.
- Options
The other main exchange-traded derivative.
- Liquidation
What happens when margin runs out, especially in crypto futures.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- U.S. Commodity Futures Trading Commission. Economic Purpose of Futures Markets and How They Work (opens in a new tab) Checked .
- U.S. Commodity Futures Trading Commission. CFTC Glossary (opens in a new tab) Checked .
Read more elsewhere
- Investopedia: Futures (opens in a new tab)
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.