Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.
Table of Contents
Futures are contracts between two parties to buy or sell an underlying asset or security — such as commodities, currencies, or even stock indexes — at a specific price on a future date.
Starting in 2026, investors will be able to trade single-stock futures (SSF) contracts as well. Single-stock futures will be offered as standard and micro contracts.
The most commonly traded futures contracts use standardized terms, known as contract specs, which detail the underlying asset, the size of the contract (e.g., bushels of corn or barrels of oil), and the way in which price fluctuations are measured for that asset or commodity.
Every contract also includes an expiration date, by which the contract must be settled with a cash payment or physical delivery of the asset (unless the contract is traded beforehand). Futures contracts can enable traders and other market participants to speculate on market movements, or hedge against future price changes.
Key Points
• A futures contract is a legal agreement that obligates parties to buy or sell an asset at a predetermined price on a future date.
• Futures contracts are used to trade specific assets, such as commodities (e.g, oil, corn, coffee), precious metals, foreign currencies, stock indexes, and more.
• Trading futures contracts allows investors to hedge against risks or speculate on price movements of the underlying asset.
• Futures contracts are standardized as to the number of units per contract, the expiration date, and other details.
• Micro futures allow investors to trade a fraction of a standard contract.
• Investors often use leverage, or margin, when trading futures, which can amplify both potential gains as well as losses.
What Are Futures?
Futures are derivatives that take the form of a contract in which two traders agree to buy or sell an asset for a specified price on a future date via an online brokerage platform that supports futures trading, or a futures exchange.
Popular underlying assets may include physical commodities like gold, corn, or oil, as well as currencies, financial instruments like stocks, and more.
Futures contracts are priced based on models that factor in the spot price (i.e., the current market price), the risk-free rate of return, the cost of storing the asset (if applicable), and other factors like time to maturity, or the time before the contract expires.
Futures contracts must be settled on the expiration date, traded beforehand, or rolled over, which can contribute to volatility in contract values.
What Is Mark to Market?
An interesting aspect of the definition of futures contracts is that they are marked to market. This means that all open futures contracts are updated according to the price changes each day, with gains and losses credited or debited from the account.
This is in contrast to other assets, like stocks or options, where price changes aren’t settled until the asset is sold or the position is closed.
Futures Exchanges
The most commonly traded futures contracts use standardized terms, and are traded on a futures exchange. For example, if you want to buy or sell corn futures, one contract would equal 5,000 bushels and be traded via the Chicago Board of Trade (CBOT).
Oil is traded on the Chicago Mercantile Exchange (CME), and one oil futures contract equals 1,000 barrels of oil.
Traders buy and sell in increments specified by the contract. To buy 50,000 bushels of corn or 10,000 barrels of oil, you’d buy 10 contracts of each.
Given the quantities and dollar amounts of these trades, investors often use leverage, thereby paying only a fraction of the total cost of the open position.
What Are Micro Futures Contracts?
A micro futures contract is smaller than a standard contract for a given asset. In other words, the standardized amounts are reduced in micro futures contracts. For example, a standard oil contract, which represents 1,000 barrels of oil, might be 1/10th of that in a micro contract.
As such, micro contracts demand less capital to trade, which can be beneficial to retail investors who are learning the ropes of futures contracts.
How Do Futures Contracts Work?
Futures contracts work by obligating buyers and sellers to fulfill their end of the bargain no later than the expiration date.
Mechanics of a Futures Trade
A futures contract obliges the buyer to buy a certain asset, or the seller to sell an asset, at an agreed-upon price, on a certain date. Each party must fulfill the terms of the contract, no matter what the market price or spot price is when the contract expires (or trade the contract before the expiration date).
When trading futures, it’s important to know that these contracts are standardized according to each type of asset, as noted above. Each contract also spells out the contract terms, which includes:
• The unit of the trade and how much one contract represents. As noted, one oil futures contract is worth 1,000 barrels of oil.
• The grade or quality of the commodity, where relevant. For example, there are different types of corn, oil, soy, etc.
• Terms of settlement (e.g., physical delivery or a cash settlement).
• Expiration date.
• Currency in which the contract is priced.
A futures contract allows investors to speculate on the direction of the underlying asset, either long or short, using leverage. (Leverage means the trader doesn’t have to put up the full amount of the contract. Instead, futures traders use a margin account.) As such, they’re a tool that allows investors to use leverage and speculation.
Recommended: How Does a Margin Account Work?
Types of Futures Contracts
There are numerous types of futures contracts, including those tied to underlying assets such as equities and various commodities.
Stocks, Commodities, and Currency Futures
Futures contracts allow investors to make bets on the prices of a wide array of assets:
• Commodity futures, which allow investors to buy or sell physical goods like crude oil, pork bellies, natural gas, orange juice, corn, wheat, and more.
• Financial futures, including stock index contracts and interest rate or debt contracts.
• Precious metal futures allow investors to bet on the future prices of gold, platinum, and silver.
• Currency futures for fiat currencies like the euro, yen, the British pound, and more.
• U.S. Treasury futures allow investors to make bets on the future value of government bonds.
Single Stock Futures
What are stock futures? Like futures contracts where the underlying is a physical commodity, stock index futures are tied to the price movements of an index like the S&P 500 index or the Russell 2000.
Starting in 2026, the CME Group, the largest derivatives trading marketplace, will launch single-stock futures contracts (SSF). The CME Group manages well-known exchanges like Chicago Mercantile Exchange and the Chicago Board of Trade, among others.
Trading and Speculating with Futures
There are two key aspects to futures trading, which are hedging and speculating. Both play an important role in the markets, and determining whether futures are actually traded or not. There are also trading strategies to keep in mind, too.
There are many strategies for trading futures contracts, just as there are many strategies for trading almost any other type of security on the US stock market or derivative. Investors can consider price pullbacks, breakout trading, or even spread trading — each requires its own gameplan, and some background research to get started.
Hedging vs. Speculating
Hedging is a big reason why investors buy futures contracts: It’s a way to protect against losses resulting from price changes, especially in commodities.
Among the businesses that hedge using futures, the goal is to reduce the risk they face from unexpected price movements, and to guarantee the price they pay or receive for a particular asset.
If a large food manufacturer wants to lock in the price of corn, for example, they might enter into a contract for $10 a bushel. Since corn contracts are typically standardized at 5,000 bushels per contract, the total amount of the futures contract would be $50,000 ($10 x 5,000), to be delivered in six months.
Entering into this futures contract would offer the buyer some protection against the possibility of rising corn prices in the future.
Let’s say the price of corn does rise to $12 a bushel by the time the contract expires. In that case, the buyer still only pays the agreed-upon price of $10 per bushel, even though the spot price is now $12 a bushel.
For the corn producer in this scenario, even though it turned out that the futures contract terms weren’t quite as favorable as the actual market price — the contract guaranteed they would get at least $10 per bushel, which provided a hedge against a potentially bigger loss.
The Use of Speculation
Although it’s possible to settle a futures contract for the physical asset specified in the contract, most futures contracts are cash-settled. That’s because speculation on price movements is one of the main reasons that investors purchase futures contracts. A futures contract gives traders the opportunity to speculate whether a commodity will go up or down and potentially profit from the price change.
If the underlying asset of the futures contract — such as gold, oil, or corn — is above the price specified in the futures contract, then the investor can sell that contract for a profit before it expires. In that case, the contract would sell for the difference between the market price of the underlying commodity and the purchase price as specified in the contract.
In such a transaction, the underlying commodities don’t change hands between the counterparties of the contract. Instead, the trade would be cash-settled in the brokerage account of the investor.
Alternatively, an investor using futures for speculation could lose money if the price of the commodity is lower than the purchase price specified in the futures contract.
Recommended: Stock Market Basics for Beginners
Risks and Benefits of Trading Futures
Futures trading has some significant risks and potential rewards.
The Risks of Futures Trading
Owing to the nature of futures trading, i.e., the binding nature of the contracts and the use of leverage, there are some obvious risks to bear in mind.
In a speculative trade, a futures contract allows you to bet on a commodity’s price movement. If you bought a futures contract, and at expiration the price of the commodity was trading above the original contract price, you’d see a profit. However, you could also lose if the commodity’s price was lower than the purchase price specified in the futures contract.
The potential risks here can be greater than they seem, because margin trading permits a much larger position than the actual amount held by the brokerage. As a result, margin investing can amplify gains, but it can also magnify losses.
Imagine a trader who has $5,000 in their brokerage account and is in a trade for a $50,000 position in crude oil. If the price of oil moves against the trade, the losses could far exceed the account’s $5,000 initial margin amount. In this case, the broker would make a margin call requiring additional funds to be deposited to cover the market losses.
Speculators can also take a short position, as in shorting a stock, if they believe the price of the underlying asset will decline. An investor would realize a gain if the underlying asset’s price was below the contract price, and a loss if the current price was above the contract price.
Again, using leverage or margin to place these bets, long or short, can potentially expose investors to more risk than they intended.
The Benefits of Trading Futures
Some of the potential benefits of trading futures include the fact that investors can use leverage to try and generate outsized returns, the markets are liquid (meaning there’s plenty of trading action) and it offers up a chance to make some relatively quick (and potentially large) returns. That should, of course, be weighed against the risks.
Futures vs Options: What’s the Difference?
There are other financial derivatives with similar characteristics to futures contracts, such as options contracts.
American-style options grant the buyer the right, but not the obligation, to buy or sell the contract’s underlying asset at any time until the contract expires.
Unlike a futures contract, however, trading options doesn’t require the options buyer to purchase or sell the underlying asset. The options buyer can simply let the option expire, losing only the premium.
However, the option seller (or writer), has the obligation to buy or sell the underlying asset at the strike price (the contract price), if the options holder chooses to exercise their contract.
A futures contract, on the other hand, obligates the buyer to purchase the underlying asset, or to pay the seller of the futures contract the cash equivalent of that asset at the time of the contract’s expiration. Likewise, the seller of the asset must fulfill their end of the contract.
The Takeaway
Most investors in futures contracts have no interest in either receiving or having to deliver the physical commodities that underlie these contracts. Rather, they’re interested in the cash profit. The means of doing so is to trade the futures contract before its expiration date.
The standardized nature of most futures makes it so many (but not all) futures contracts will expire on the third Friday of each month. Some commodities are seasonal, and only trade during specific months. High-grade corn trades on the CBOT in March, May, July, September, and December, for example.
If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.
FAQ
What is the main purpose of a futures contract?
Futures contracts enable buyers and sellers to set a price for a certain amount of an asset now, to be paid for (and/or delivered) in the future. These contracts help businesses and producers hedge against price risk, and enable some traders to bet on price fluctuations.
Do you have to buy the asset when a futures contract expires?
The buyer has to pay the agreed-upon price for the underlying asset, no matter what the spot price (or market price) is at the time, or trade the contract before the expiration date.
Are futures contracts safe for beginners?
Futures contracts trading is a high-risk and complex endeavor. Beginners may do better to explore other investing strategies before attempting to trade futures.
How much money do you need to trade futures?
Trading futures can be volatile, and the risk of loss is high when using leverage. To protect yourself from potential losses, it’s important to know the minimum account and margin requirements at your brokerage, as well as other factors.
Can you trade futures on regular stocks?
Starting in 2026, there are plans to launch single stock futures (SSFs) for trading. Each standard contract will represent 100 shares of the underlying stock; micro contracts may also be available. Single stock futures will be cash-settled, as there is no physical delivery of stock assets.
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Options involve substantial risk of loss and the possibility an investor may lose the entire amount invested. Before starting options trading, investors should be familiar with the Characteristics and Risks of Standardized Options . TTax implications with options should be considered. Consult your tax advisor to understand any impacts to your taxes.
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