What Does Futures Mean

What Does Futures Mean

A future is a standardized legal agreement to buy or sell a specific asset at a predetermined price on a set date in the future. In finance, the term refers to a derivative contract traded on an exchange, but in everyday speech it simply means something that has not yet happened.

How Futures Contracts Work

A futures contract locks in the price of an underlying asset today for delivery at a later date. The underlying asset can be a commodity like crude oil or wheat, a financial instrument like a stock index or Treasury bond, or a currency. Buyers take a long position, agreeing to purchase; sellers take a short position, agreeing to deliver. Both parties post margin, a good-faith deposit that covers potential losses as the contract's value fluctuates.

Futures vs Options vs Spot

Futures differ from options in a key way: an option gives the right but not the obligation to trade, while a futures contract creates an obligation for both sides. Compared to a spot purchase, where goods change hands immediately, futures defer the transaction and price discovery to a later month. This distinction matters for hedgers who lock in costs and speculators who bet on price direction.

Common Uses of Futures

• Hedging: A farmer sells corn futures to lock in a selling price before harvest, protecting against a price drop.
• Speculation: A trader buys S&P 500 futures to gain exposure to the stock market without purchasing every stock in the index.
• Arbitrage: A participant exploits a price gap between a futures contract and the underlying asset or between two exchanges.

Key Contract Specs to Know

Risks and Considerations

Futures amplify both gains and losses because of leverage. A small price move can result in a large percentage change in the account balance. Before trading, it is important to understand margin calls, contract sizes, and the cost of rolling a position from one expiration month to the next.