What Is a Futures Contract?

Futures are financial derivatives that bind the parties to trade an item at a defined price and date in the future. Regardless of the prevailing market price at the expiration date, the buyer or seller must acquire or sell the underlying asset at the specified price. Physical commodities or other financial instruments are examples of underlying assets. Futures contracts specify the quantity of the underlying asset and are standardized to make futures trading easier. Futures can be utilized for trading speculation or hedging. The terms “futures contract” and “futures” are interchangeable. You could hear someone say they bought oil futures, which is the same as saying they bought an oil futures contract. When someone mentions “futures contract,” they usually mean a specific form of future, such as oil, gold, bonds, or S&P 500 index futures. One of the most straightforward methods to invest in oil is through futures contracts. “Futures” is a more generic word that is frequently used to refer to the entire market, as in “They’re a futures trader.”

It is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. One needs to have sufficient margin in his account to create a future position. It can be either in the form of cash or collateral. A margin is charged to both the buyer and the seller as they carry unlimited risk.

There are two positions a futures trader can take; a long futures position or a short futures position.

Long futures: A trader takes a long futures position when he expects the markets to go up. If the markets move in the direction of the position taken, he would make money. If not, he would lose money

Short futures: A trader takes a short futures position when he expects the market to fall. If the market goes down, he would make money. If the market goes up, he would lose money.