What Are Futures Contracts?Every day, businesses, investors, and traders make decisions about prices that haven't happened yet.
An airline wants to know what fuel will cost six months from now. A farmer wants certainty about the value of next season's harvest. A fund manager wants protection against a sudden market downturn.
None of them can predict the future, but all of them can manage the risk that comes with it.
That's where futures contracts come in.
A futures contract is one of the most important tools in modern financial markets. Originally developed to help producers and buyers manage uncertainty, futures now underpin markets worth trillions of dollars and are used across commodities, stock indexes, currencies, interest rates, and even cryptocurrencies.
Understanding how futures contracts work, who uses them, why they exist, and what makes them different from other financial instruments, is the first step toward understanding one of the world's most influential trading segments.
📌 The Basic Idea
(Illustrative purposes)
A futures contract is a legally binding agreement to buy or sell a specific asset, at a predetermined price, on a set future date.
Think of it like this: imagine a coffee shop owner who knows they'll need 500 pounds of coffee beans in three months. They're worried the price might rise before then. A coffee farmer, on the other hand, worries the price might fall before their harvest is ready.
Both parties have a problem. A futures contract solves it for both of them:
The coffee shop owner locks in today's price , protecting against a potential price increase.
The coffee farmer locks in today's price , protecting against a potential price drop.
Neither party has to guess what the market will do. The price is agreed upon now. Delivery (or settlement) happens later.
That's the core of a futures contract.
📌 What Can Be Traded Using Futures?
(Illustrative purposes)
Futures contracts exist across a wide range of asset classes. The most common categories include:
Commodities: Agricultural products such as corn, wheat, soybeans, and coffee. Energy products like crude oil and natural gas. Metals including gold, silver, and copper.
Financial Instruments: Stock market indexes such as the S&P 500 or NASDAQ. Government bonds and interest rate products. Foreign currencies.
Cryptocurrencies: Bitcoin and Ethereum futures are now listed on major regulated exchanges, bringing digital assets into the traditional futures framework.
Each of these markets has its own contract specifications, including the contract size, tick value, and expiration schedule, which are standardized by the exchange on which they trade.
📌 Who Uses Futures Contracts?
Futures markets attract two broad categories of participants, each with different motivations.
Hedgers
Hedgers are businesses or individuals who use futures to manage risk related to an asset they already deal with in the real world.
Examples include:
An airline that uses crude oil futures to stabilize fuel costs
A wheat farmer who wants certainty on the price they'll receive at harvest
A fund manager who uses index futures to manage portfolio exposure during periods of uncertainty
For hedgers, the futures market is primarily a risk management tool, not a means of speculating on price direction.
Speculators
Speculators participate in the futures market without any underlying exposure to the physical commodity or asset. They aim to profit from price movements by taking positions based on their market analysis.
Speculators play an important role in futures markets: they provide liquidity, meaning there is typically a willing counterparty available for hedgers and other traders. Without speculators, markets would be thinner and less efficient.
📌 Key Characteristics of Futures Contracts
(Illustrative purposes)
Understanding how futures work in practice requires familiarity with a few core concepts.
Standardization
Unlike private agreements, exchange-traded futures contracts are standardized. The quantity, quality (where applicable), and delivery date are all defined by the exchange. This makes contracts interchangeable and easy to trade.
Leverage
Futures are traded on margin. This means a trader is only required to deposit a fraction of the contract's total value to hold a position. This is known as the initial margin requirement. While leverage can amplify gains, it equally amplifies losses, and is an important risk consideration for any market participant.
Mark-to-Market Settlement
Futures positions are settled daily. At the end of each trading session, gains and losses are calculated based on the closing price and credited or debited from a trader's account. This process is called mark-to-market.
Expiration
Every futures contract has an expiration date on which the contract must be settled. Settlement can occur in two ways:
Physical delivery: The actual commodity or asset changes hands.
Cash settlement: The difference between the contract price and the market price at expiration is paid in cash. Most financial futures (e.g., index futures) are cash-settled.
Traders who do not wish to take or make delivery can close their position before expiration by entering an offsetting trade.
📌 Why Do Futures Markets Exist?
Futures markets were created to solve a real-world problem: price uncertainty.
Historically, commodity producers and buyers faced significant uncertainty about future prices. A farmer planting a crop in spring had no way of knowing what price they would receive at harvest. A manufacturer reliant on raw materials faced the same unpredictability.
Futures markets emerged as a solution, providing a venue where producers and consumers could agree on prices in advance, transferring that price risk to those willing to take it on.
Over time, futures markets expanded well beyond agriculture, growing to cover financial instruments, energy, metals, and more. Today, they are a fundamental part of the global financial system, used by corporations, governments, financial institutions, and individual traders worldwide.
📌 A Few Things to Keep in Mind
Futures trading involves significant risk and is not appropriate for all investors. Key points to be aware of:
Leverage means losses can exceed the initial margin deposited.
Futures markets can be volatile. Prices can move rapidly in response to economic data, geopolitical events, and supply/demand factors.
Contract specifications, margin requirements, and trading hours vary by product and exchange.
Prospective traders should familiarize themselves with the specific contracts they intend to trade and understand the associated risks before participating.
📌 Summing Up
At their core, futures contracts are about certainty in an uncertain world.
They allow buyers and sellers to agree on a price today for a transaction that will occur tomorrow, helping businesses manage risk and plan ahead with greater confidence. From farmers and energy producers to hedge funds and individual traders, futures markets bring together participants with different objectives but a common need for an efficient marketplace.
While futures are often associated with active trading and speculation, their original purpose remains unchanged: transferring risk from those who want to avoid it to those willing to accept it.
Whether you're exploring futures as a trader, investor, or simply seeking to understand how global markets function, a solid grasp of futures contracts provides an important foundation for everything that follows.
The markets may be uncertain, but understanding how they work doesn't have to be.
– Team Plus500
📌 Disclaimer
IMPORTANT: Trading in futures and options carries substantial risk of loss and is not suitable for every investor. The valuation of futures and options contracts may fluctuate rapidly and unpredictably, and, as a result, clients may lose more than their original investments. In no event should the content of this website be construed as an express or implied promise or guarantee by or from Plus500US Financial Services LLC that you will profit or that losses can or will be limited in any manner whatsoever. Market volatility, trade volume, and system availability may delay account access and trade executions. Past results are no indication of future performance. Information provided in this correspondence is intended solely for informational purposes and is obtained from sources believed to be reliable. Information is in no way guaranteed. The trading of futures is available through Plus500US Financial Services LLC d/b/a Plus500, a Futures Commission Merchant registered with the US Commodity Futures Trading Commission and a member of the National Futures Association (NFA ID number 0001398). Plus500US Financial Services LLC is a wholly-owned subsidiary of Plus500US Inc. Trading privileges subject to review and approval. Not all applicants will qualify. Information collected on account applications will be used to verify an applicant’s identity, as required under Federal law.
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