Futures contract

What futures contract means

A futures contract is a standardised agreement to buy or sell a specific asset at a fixed price on a set future date. It is traded on an exchange, and every detail apart from the price is fixed by the exchange: what the underlying asset is, how much of it one contract covers, the quality or grade, the delivery month and how the contract is settled.

Futures exist for commodities such as crude oil, gold and wheat, for stock indices, interest rates, currencies and for some cryptocurrencies. Hedgers use them to lock in a price, for example a producer or a consumer of a commodity. Speculators use them to take a view on price movement without holding the asset. Because both buyer and seller commit to the deal, futures differ from options, where only the buyer has the choice.

Most retail traders never take delivery. Positions are closed before expiry, or rolled into the next contract month, and the profit or loss is settled in cash.

How it works

Each contract has a size, a tick size (the smallest price move) and a tick value (what that move is worth in money). The buyer is said to be long and gains when the price rises; the seller is short and gains when it falls.

An exchange-linked clearing house stands between the two sides, which reduces counterparty risk. To trade, you post initial margin, a good-faith deposit that is a fraction of the contract's value. Each day the position is marked to market: gains are credited and losses debited to your account. If the balance drops below the maintenance margin, you receive a margin call and must top up or the position is closed.

Key features:

• Expiry and settlement: contracts end on a set date and settle by physical delivery or in cash, according to the contract specification.
• Rolling: to stay in a position beyond expiry, you close the near contract and open the next one.
• Contango and backwardation: the price of later contracts can be above or below the nearer one, which affects roll costs.
• Leverage: because only margin is posted, a small price move can mean a large percentage change in your capital.

A worked example

These numbers are illustrative. Take a crude oil futures contract that covers 1,000 barrels. Each 1 USD per barrel move equals 1,000 USD per contract.

1. Entry: you buy 1 contract at 70.00 USD per barrel. Notional value: 70 x 1,000 = 70,000 USD.
2. Initial margin required by the broker: say 5,000 USD, about 7% of the notional.
3. Price rises to 72.00. Gain: 2 x 1,000 = 2,000 USD, which is 40% of the 5,000 USD margin.
4. Instead, price falls to 67.50. Loss: 2.5 x 1,000 = 2,500 USD, which is 50% of the margin.
5. If maintenance margin is 4,000 USD and your equity falls below that, a margin call follows.

This shows how leverage magnifies results in both directions. A 3.6% fall in oil produced a 50% fall in the margin capital. Margin levels shown are examples only; the exchange and broker set the real ones, and they change with volatility.

Why it matters

Futures are the main exchange-traded way to hedge and speculate on commodities, indices and rates. Prices from futures markets also feed into many CFDs: an index or commodity CFD is often quoted from the front-month future. Knowing how futures work helps you understand expiry, rollover and why a CFD price can differ from the spot price.

Costs include commission per contract, exchange and clearing fees, the bid-ask spread and, if you roll, the price difference between months. Brokers differ in margin requirements, platform quality, markets covered and overnight margin rules. Many retail brokers offer futures only in some countries, and rules differ between regions.

How to use it in practice

1. Read the contract specification on the exchange website: size, tick value, expiry and settlement type.
2. Calculate the notional value and the money value of one tick before trading.
3. Compare initial and maintenance margin and know the broker's rules for a shortfall.
4. Check the expiry date and the broker's policy on delivery, since some close positions automatically before expiry.
5. Plan how you will roll positions and what that costs.
6. Size your position by the amount you can afford to lose, not by the margin available.
7. Compare commissions and fees per contract between brokers.

Common mistakes and misconceptions

• Thinking margin is the cost of the trade. It is a deposit; your potential loss can be much larger than it.
• Forgetting expiry. A position left open can be force-closed or, in physically settled contracts, lead to delivery obligations.
• Ignoring contract size. One contract can represent a very large exposure.
• Assuming futures and spot prices are identical. The gap reflects financing costs, storage and expectations.
• Treating daily settlement as optional. Losses are debited daily, not at the end.
• Believing futures are only for professionals. They are accessible to retail traders in many places, but risk is high.

Risks and limitations

Futures are leveraged and can produce losses beyond the initial margin, particularly in fast moves or when markets gap. Liquidity differs widely between contracts and delivery months. Margin requirements can be raised at short notice. Trading hours, tax treatment and investor protection vary by country and broker. This article is general education, not a recommendation.

How Brokeli looks at it

For futures access, we note which brokers offer exchange-traded futures, which markets, the commission and exchange fee structure, the margin rules and the countries where service is available. These details are drawn from published research snapshots and kept apart from CFD pricing so readers can compare like with like.