Futures Contract

Stock trading dictionary: meaning, example and how traders use it.

Last updated: October 17, 2026

Definition: A futures contract is a standardized, exchange-traded agreement to buy or sell a specific quantity of an asset, such as oil, corn, a currency, or a stock index, at a price agreed today for delivery or cash settlement on a set future date.

How a futures contract works

Futures are a type of derivative: their value comes from an underlying asset. Each contract is standardized by the exchange that lists it, which fixes the contract size, tick value, expiration months, and whether it settles by physical delivery or in cash. A clearinghouse stands between buyer and seller, so each side faces the clearinghouse rather than each other.

The buyer (long) profits if the price rises; the seller (short) profits if it falls. Unlike an option, both sides are obligated to perform at expiration unless they close the position first, which most traders do.

Margin and daily settlement

Traders do not pay the full contract value. Instead they post an initial margin deposit, a fraction of the notional value. Every day the position is marked to market: gains are credited and losses debited. If the account falls below the maintenance level, the trader receives a margin call and must add funds or have the position closed.

This structure creates substantial leverage. A small percentage move in the underlying can produce a large percentage gain or loss on the money deposited.

Example of a futures trade

Suppose a crude oil contract covers 1,000 barrels and a trader buys one at $70 per barrel, a notional value of $70,000. The broker requires a hypothetical initial margin of $7,000.

  • If oil rises to $73, the gain is $3 x 1,000 = $3,000, about 43% on the margin posted.
  • If oil falls to $66, the loss is $4,000. The account now holds $3,000; if maintenance margin is $6,000, the trader must deposit more money or exit.

The underlying moved only about 4-6%, yet the result on capital was far larger in both directions.

Who uses futures contracts

Hedgers use futures to lock in prices. A farmer can sell grain futures before harvest; an airline can buy fuel futures to limit cost surprises; a fund can sell stock index futures to protect a portfolio during a downturn. Importers and exporters use currency futures to manage exchange-rate exposure.

Speculators take positions to profit from expected price moves in commodities, interest rates, or indexes, and in doing so supply much of the market's liquidity.

Risks of futures

Losses can exceed the initial deposit, prices can gap overnight, and contracts must be rolled or closed before expiration to avoid delivery obligations. Futures are generally better suited to experienced traders with strict risk controls.

Frequently asked questions

What is the difference between futures and options?

A futures contract obligates both parties to transact at the agreed price, while an option gives the buyer the right, but not the obligation, to buy or sell.

Do you have to take delivery on a futures contract?

Only if you hold a physically settled contract into the delivery period. Most traders close or roll positions before then, and many contracts settle in cash.

Can you lose more than you invest in futures?

Yes. Because of leverage and daily settlement, losses can exceed the initial margin, and the trader is responsible for the shortfall.

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For information only, not investment advice. See the disclaimer.