What a Futures Contract Actually Is
A futures contract is a promise. Two parties agree today on a price for something — corn, crude oil, gold, Treasury bonds, stock indexes — to be delivered later. The exchange standardizes everything: the contract size, the quality, the delivery months, and the tick value. That standardization is what lets millions of contracts change hands every day without anyone negotiating terms.
Most traders never take or make delivery. They buy or sell the contract, watch the price move, and close the position before delivery becomes an issue. Your profit or loss is simply the difference between where you got in and where you got out, multiplied by the contract's point value.
The market exists because of two very different crowds sharing it. Hedgers — farmers, fuel buyers, manufacturers — use futures to lock in prices and remove risk from their businesses. Speculators accept that risk in pursuit of profit, and in doing so provide the liquidity hedgers need. Both belong here, but they play entirely different games with the same contracts.
How Money Moves: Margin and Daily Settlement
To hold a futures position you post margin — a good-faith deposit set by the exchange, often only 3 to 12 percent of the contract's full value. That small deposit controls a large position, which is the source of both the opportunity and the danger. Each day the exchange marks your position to market: gains are credited, losses are debited, and if your account falls below the maintenance level you get a margin call demanding more funds.
Futures trading involves substantial risk of loss and is not suitable for all investors. Leverage cuts both ways, and a move that seems small in percentage terms can be large relative to your account.
A Sensible First Path
- Learn one market. Pick something you can follow — corn if you know agriculture, gold if you follow metals — and read its contract specifications before anything else.
- Paper trade. Simulated trading lets you feel order placement and daily P&L without real money at risk. We offer a free two-week trial of our client services that includes simulated trading.
- Decide your risk per trade before you enter. Know your exit if wrong before you know your target if right.
- Consider a broker-assisted account. A seasoned broker can catch order-entry mistakes and explain mechanics while you learn.