What Is a Futures Contract? Definition, Examples & Benefits

What Is a Futures Contract?

A futures contract is a standardized agreement to buy or sell a specific asset at a predetermined price on a set future date. Traded on regulated exchanges, futures allow traders, investors, and corporations to lock in prices, speculate on market moves, and manage risk across commodities, currencies, stock indexes, and interest rates.

How a Futures Contract Works

Each contract specifies quantity, quality, delivery month, and is backed by the exchange’s clearinghouse. Traders post margin—often 5%–10% of contract value—and positions are marked to market daily. Profits or losses flow to the margin account, giving participants leveraged exposure under transparent, regulated conditions. Positions can be closed before expiration or held for physical delivery or cash settlement.

Real-World Example

An airline worried about rising jet fuel costs might purchase crude oil futures at $80 per barrel for delivery in six months. If spot prices climb to $95, the gain on the futures offsets higher fuel expenses. Conversely, a refinery can sell futures to lock in revenue, showing how opposing hedges create liquidity.

Key Benefits of Trading Futures Contracts

Futures contracts offer deep liquidity, tight bid-ask spreads, and nearly 24-hour electronic access. Because margin requirements are modest, they provide efficient leverage. Unlike options, they carry no time-decay. For portfolio managers, equity-index futures deliver instant diversification and tactical allocation without disturbing underlying holdings or triggering immediate taxes.

Risks to Consider

Leverage magnifies losses as quickly as gains, and sudden price gaps can trigger margin calls. Futures trading also exposes participants to basis risk—the difference between futures and spot prices—and to rollover costs when positions are extended. Beginners should start with smaller contracts and follow disciplined risk management.

Bottom Line

A futures contract is a versatile tool for hedging and speculation. By mastering its mechanics, costs, and risks, traders and businesses can stabilize budgets, express market views, and diversify portfolios with speed and efficiency. However, prudent leverage and research remain essential for long-term success.