A futures contract is a financial instrument in which one party agrees to buy or sell the underlying asset at a specific time in the future for a predetermined price. It’s a powerful derivative that can provide speculators with unique opportunities to make money but is also highly volatile, meaning that losses can quickly outweigh gains.
Most people who trade futures do not take delivery of the commodity (such as oil, copper, gold or cattle) that they’re trading in the form of cash settlement unless specified by their position. This includes hedgers, real companies that are using futures to manage their risk and hedging their exposure to price changes (such as a farmer locking in the cost of their corn before harvest) and traders who don’t own the actual commodity but instead trade on speculation (a.k.a.’speculators’).
Because these positions are highly leveraged, they can be more risky than trading individual stocks and ETFs. The high level of leverage can magnify profits but losses can also come more quickly.
Futures are regulated by the Commodity Futures Trading Commission (CFTC) and they can be traded on various exchanges that specialize in them. Some popular futures markets include e-minis, E-micros and Micros, commodities like soybeans, coffee, crude oil, gold and natural gas, as well as financial futures contracts including interest rate indexes and stock market index futures. There are even futures contracts for cryptocurrencies and organ transplants! Unlike individual stocks, most futures markets don’t lend themselves to insider trading and are typically agnostic as to direction.