Futures are derivative contracts to buy or sell an asset at a future date at an agreed-upon price.
Commodities represent a big part of the futures-trading world. Stock futures investing lets you trade futures of individual companies and shares of ETFs.
Futures contracts also exist for bonds and even bitcoin. Some traders like trading futures because they can take a substantial position (the amount invested) while putting up a relatively small amount of cash. That gives them greater potential for leverage than just owning the securities directly.
Most investors think about buying an asset anticipating that its price will go up in the future. But short-selling lets investors do the opposite — borrow money to bet an asset's price will fall so they can buy later at a lower price.
One common application for futures relates to the U.S. stock market. Someone wanting to hedge exposure to stocks may short-sell a futures contract on the Standard & Poor’s 500. If stocks fall, they make money on the short, balancing out their exposure to the index. Conversely, the same investor may feel confident in the future and buy a long contract – gaining a lot of upside if stocks move higher.
Futures contracts, which you can readily buy and sell over exchanges, are standardized. Each futures contract will typically specify all the different contract parameters:
Many speculators borrow a substantial amount of money to play the futures market because it’s the main way to magnify relatively small price movements to potentially create profits that justify the time and effort. But borrowing money also increases risk: if markets move against you more than expected, you could lose more than you invested.
Leverage and margin rules are often more liberal in futures than in securities. A broker may allow leverage such as 10:1 or 20:1 depending on the contract. The greater the leverage, the greater the gains — but also the greater the potential loss. Example: a 5% move with 10:1 leverage can mean a 50% gain or loss.
Futures are complex and can be volatile. Use disciplined risk control, avoid overexposure, and ensure you fully understand margin requirements before trading.
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