What Are Futures Contracts

Futures contracts might sound like something only Wall Street pros mess with, but they’re more common—and useful—than most people think. Whether you’re interested in commodities like oil or coffee, currencies like the euro or yen, or even stock indices, futures give you a way to trade what you think will happen next.

If you’ve ever wondered what futures contracts actually are and how regular traders or investors can use them, here’s a clear, no-nonsense explanation.

Futures trader
Pictures of a Swedish futures trader at work. Picture courtesy of terminer.se

So, What Exactly Is a Futures Contract?

A futures contract is a legal agreement to buy or sell a specific asset at a set price on a set date in the future. Simple as that. You’re not buying the asset right now—you’re agreeing on a price today for a deal that settles later.

Let’s say you enter a futures contract to buy 100 barrels of oil at $80 per barrel, settling in three months. You’re basically betting that oil prices will go above $80—so when the contract expires, you can either sell the oil at a profit or just close the contract early and take the cash difference.

Most people don’t want to take delivery of physical oil or wheat, though. So these contracts are often closed or “rolled over” before the expiration date. What matters is how the price moves between now and then.

Where Are Futures Traded?

Futures are traded on regulated exchanges like the Chicago Mercantile Exchange (CME), Intercontinental Exchange (ICE), or Eurex. These platforms standardize contracts—meaning everyone’s trading the same thing under the same terms—and they require traders to post margin (a portion of the total contract value) to control risk.

This gives futures trading structure, transparency, and a lot of liquidity, which is why big institutions love it—but it’s accessible to individuals too.

How Futures Are Used: Speculation and Hedging

Speculation

This is the most common use among traders. You’re betting on whether the price of something will go up or down. If you expect gold to rise, you buy (go long) a gold futures contract. If you expect it to drop, you sell (go short).

Since futures are leveraged, you only need to put down a fraction of the contract’s value as margin. That means gains—and losses—are magnified. It’s high risk, high reward, and not for anyone who panics easily.

Hedging

Futures started as a way for businesses to lock in prices and manage risk. Think farmers locking in wheat prices before harvest, or airlines buying fuel futures to avoid price shocks.

Now, even investors use futures to hedge. Say you’ve got a stock portfolio and you’re worried about a short-term market dip. Selling an index futures contract lets you offset some of those losses if the market drops—without having to sell all your stocks.

Popular Types of Futures Contracts

Futures aren’t just for commodities. You can trade futures on:

  • Commodities: oil, natural gas, wheat, coffee, gold
  • Currencies: EUR/USD, GBP/USD, JPY
  • Stock indices: S&P 500, FTSE 100, DAX
  • Interest rates: government bonds, treasury futures
  • Crypto: Bitcoin and Ethereum (via crypto exchanges or futures exchanges like CME)

Each market has its own quirks, risks, and trading hours, so it’s worth researching the specific contract before jumping in.

What You Need to Trade Futures

To trade futures, you’ll need:

  • A futures trading account (not all brokers offer this—some only offer CFDs or spot trading)
  • A decent grasp of margin requirements and leverage
  • A clear trading plan—because the moves can be sharp and fast

It’s also a good idea to start with a demo or paper trade before committing real money. Futures trading can get wild, especially around expiration dates, economic data releases, or geopolitical events.

The Pros and Cons

Pros:

  • Huge market access (commodities, currencies, indices, and more)
  • Transparent, regulated exchanges
  • Leverage lets you control large positions with smaller capital
  • Highly liquid markets, especially for major contracts

Cons:

  • High risk, especially with leverage
  • Margin calls can wipe out accounts quickly if trades go against you
  • Expiry dates require active management
  • Not ideal for long-term, set-and-forget investors

In Conclusion

Futures contracts are powerful tools—whether you’re looking to speculate on oil prices, hedge your portfolio, or trade short-term moves in the S&P 500. But they’re not beginner-friendly if you dive in without a plan.

If you’re interested, start slow. Learn how margin works, study the contract specs, and get a feel for the rhythm of the market you’re trading. Futures can be sharp, fast, and unforgiving—but in the right hands, they’re one of the most flexible and useful instruments in the financial world.

This article was last updated on: April 3, 2025