FUTURES
FOUNDATIONS / CHAPTER 01
What Are Futures?
Futures are standardized contracts used to trade the future value of an underlying market.
A futures contract is an agreement to buy or sell a specific asset at a predetermined price at a future date. Unlike buying a stock, however, trading a futures contract does not mean that you own a company or the underlying asset itself. You are trading a contract whose value changes as the underlying market moves.
Futures exist across many different markets. Traders can buy and sell futures based on stock indexes such as the S&P 500 and Nasdaq-100, commodities such as crude oil and gold, agricultural products, currencies, interest rates and other financial markets.
One contract. One set of rules.
What makes futures different from many other financial instruments is that the contracts are standardized. Each contract has predefined specifications established by the exchange: what it represents, its contract size, minimum price movement, expiration date and how gains and losses are calculated. This standardization allows thousands of market participants to trade the same instrument efficiently.
You can take either side of the market. If you expect the price of a futures contract to rise, you can go long. If you expect it to fall, you can go short. Your profit or loss is determined by how far the market moves after you enter the position, multiplied by the value of that movement and the number of contracts you trade.
Futures were originally developed to help producers and buyers manage uncertainty about future prices. A farmer, for example, could use futures to lock in a price for a crop before harvest. Today, futures markets still serve that hedging function, but they are also heavily used by banks, investment funds, corporations and independent traders to gain or reduce market exposure.
Leverage changes everything.
For a trader, one of the major characteristics of futures is leverage. You generally do not need to put up the full value of the underlying exposure to open a position. Instead, the broker or exchange requires margin. This makes futures capital-efficient, but it also means relatively small market movements can produce significant gains or losses.
That is why understanding the contract comes before thinking about strategy. Before placing a futures trade, you should know what the contract represents, how much each point or tick is worth, how much capital is required, and how much you could lose if the market moves against you.
A futures contract is an agreement to buy or sell a specific asset at a predetermined price at a future date. Unlike buying a stock, however, trading a futures contract does not mean that you own a company or the underlying asset itself. You are trading a contract whose value changes as the underlying market moves.
Futures exist across many different markets. Traders can buy and sell futures based on stock indexes such as the S&P 500 and Nasdaq-100, commodities such as crude oil and gold, agricultural products, currencies, interest rates and other financial markets.
One contract. One set of rules.
What makes futures different from many other financial instruments is that the contracts are standardized. Each contract has predefined specifications established by the exchange: what it represents, its contract size, minimum price movement, expiration date and how gains and losses are calculated. This standardization allows thousands of market participants to trade the same instrument efficiently.
You can take either side of the market. If you expect the price of a futures contract to rise, you can go long. If you expect it to fall, you can go short. Your profit or loss is determined by how far the market moves after you enter the position, multiplied by the value of that movement and the number of contracts you trade.
Futures were originally developed to help producers and buyers manage uncertainty about future prices. A farmer, for example, could use futures to lock in a price for a crop before harvest. Today, futures markets still serve that hedging function, but they are also heavily used by banks, investment funds, corporations and independent traders to gain or reduce market exposure.
Leverage changes everything.
For a trader, one of the major characteristics of futures is leverage. You generally do not need to put up the full value of the underlying exposure to open a position. Instead, the broker or exchange requires margin. This makes futures capital-efficient, but it also means relatively small market movements can produce significant gains or losses.
That is why understanding the contract comes before thinking about strategy. Before placing a futures trade, you should know what the contract represents, how much each point or tick is worth, how much capital is required, and how much you could lose if the market moves against you.
KEY TAKEAWAY
A futures position gives you exposure to market movement through a standardized contract—not ownership of the underlying asset.