What does futures mean

Again, the net difference would be settled at the expiration of the contract. An investor would realize a gain if the underlying asset's price was below the contract price and a loss if the current price was above the contract price.

It's important to note that trading on margin allows for a much larger position than the amount held by the brokerage account. As a result, margin investing can amplify gains, but it can also magnify losses. In this case, the broker would make a margin call requiring additional funds to be deposited to cover the market losses. Futures can be used to hedge the price movement of the underlying asset. Here, the goal is to prevent losses from potentially unfavorable price changes rather than to speculate.

Many companies that enter hedges are using—or in many cases producing—the underlying asset. For example, corn farmers can use futures to lock in a specific price for selling their corn crop. By doing so, they reduce their risk and guarantee they will receive the fixed price. If the price of corn decreased, the farmer would have a gain on the hedge to offset losses from selling the corn at the market. With such a gain and loss offsetting each other, the hedging effectively locks in an acceptable market price.

The CFTC is a federal agency created by Congress in to ensure the integrity of futures market pricing, including preventing abusive trading practices, fraud, and regulating brokerage firms engaged in futures trading. Let's say a trader wants to speculate on the price of crude oil by entering into a futures contract in May with the expectation that the price will be higher by year-end.

However, the trader will only need to pay a fraction of that amount up-front—the initial margin that they deposit with the broker.

From May to December, the price of oil fluctuates as does the value of the futures contract. If oil's price gets too volatile, the broker may ask for additional funds to be deposited into the margin account—a maintenance margin. In December, the end date of the contract is approaching, which is on the third Friday of the month.

Futures contracts are an investment vehicle that allows the buyer to bet on the future price of a commodity or other security. There are many types of futures contracts available, on assets such as oil, stock market indices, currencies, and agricultural products.

Unlike forward contracts, which are customized between the parties involved, futures contracts trade on organized exchanges such as those operated by the CME Group Inc. Futures contracts are popular among traders, who aim to profit on price swings, as well as commercial customers who wish to hedge their risks. Yes, futures contracts are a type of derivative product. They are derivatives because their value is based on the value of an underlying asset, such as oil in the case of crude oil futures.

Like many derivatives, futures are a leveraged financial instrument, offering the potential for outsize gains or losses. As such, they are generally considered to be an advanced trading instrument and are mostly traded only by experienced investors and institutions.

Oftentimes, traders who hold futures contracts until expiration will settle their position in cash. In other words, the trader will simply pay or receive a cash settlement depending on whether the underlying asset increased or decreased during the investment holding period. In some cases, however, futures contracts will require physical delivery. In this scenario, the investor holding the contract upon expiration would be responsible for storing the goods and would need to cover costs for material handling, physical storage, and insurance.

CME Group. American Style Options. Commodity Futures Trading Commission. Futures contracts are used to hedge risk and to speculate in the market.

The buyer of a futures contract is referred to as holding a long position, while the seller is referred to has holding a short position. Futures are traded on public exchanges, and are standardized derivative contracts. A forward is a related, but separate concept; forward contracts are non-standardized futures. Futures were originally developed to trade commodities such as agricultural products and minerals, and were used to minimize risks for producers from fluctuating market prices for their goods.

By having an agreed-upon price for future delivery, producers were able to more effectively make long-term business plans. Speculators would enter futures contracts in the hope that the price they agreed to pay upon delivery was lower than the market price at that time, giving them a profit in exchange for agreeing to take on risk.

From this basic premise, futures have grown to facilitate the exchange of almost every variety of financial product. The contracts are settled in one of two ways: physical delivery, where one party delivering the underlying assets to the other party, or by cash settlement. Download now. Futures investing basics. Educational videos. Investing Basics: Futures Gain a better understanding of futures and contract specifications like tick size, contract size, delivery, and margin requirements.

Futures Market Participants Learn how the major players in the futures market—producers, hedgers, and speculators—buy and sell futures contracts in an attempt to secure optimal prices. A futures contract is a legal agreement to buy or sell a particular commodity asset, or security at a predetermined price at a specified time in the future. Futures contracts are standardized for quality and quantity to facilitate trading on a futures exchange. The buyer of a futures contract is taking on the obligation to buy and receive the underlying asset when the futures contract expires.

The seller of the futures contract is taking on the obligation to provide and deliver the underlying asset at the expiration date. Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price. Here, the buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date.

Underlying assets include physical commodities or other financial instruments. Futures contracts detail the quantity of the underlying asset and are standardized to facilitate trading on a futures exchange. Futures can be used for hedging or trade speculation.

For example, you might hear somebody say they bought oil futures, which means the same thing as an oil futures contract. Futures contracts are also one of the most direct ways to invest in oil. The term "futures" is more general, and is often used to refer to the whole market, such as, "They're a futures trader. Futures contracts are standardized, unlike forward contracts. Forwards are similar types of agreements that lock in a future price in the present, but forwards are traded over-the-counter OTC and have customizable terms that are arrived at between the counterparties.

Futures contracts, on the other hand, will each have the same terms regardless of who is the counterparty. Futures contracts are used by two categories of market participants: hedgers and speculators. Producers or purchasers of an underlying asset hedge or guarantee the price at which the commodity is sold or purchased, while portfolio managers and traders may also make a bet on the price movements of an underlying asset using futures.

An oil producer needs to sell its oil. They may use futures contracts to do it. This way they can lock in a price they will sell at, and then deliver the oil to the buyer when the futures contract expires. Similarly, a manufacturing company may need oil for making widgets. Since they like to plan ahead and always have oil coming in each month, they too may use futures contracts. This way they know in advance the price they will pay for oil the futures contract price and they know they will be taking delivery of the oil once the contract expires.

Futures are available on many different types of assets. There are futures contracts on stock exchange indexes , commodities, and currencies. Imagine an oil producer plans to produce one million barrels of oil over the next year.

It will be ready for delivery in 12 months. The producer could produce the oil, and then sell it at the current market prices one year from today. Given the volatility of oil prices, the market price at that time could be very different than the current price.

If the oil producer thinks oil will be higher in one year, they may opt not to lock in a price now. A mathematical model is used to price futures, which takes into account the current spot price , the risk-free rate of return , time to maturity, storage costs, dividends, dividend yields, and convenience yields.