Futures Fundamentals

A futures contract is an agreement to buy or sell an underlying financial instrument or commodity at a specified future date and price. Each futures contract represents a specific amount of a given commodity or financial instrument. The most widely traded commodity future contract, for example, is crude oil, which has a contract unit of 1,000 barrels. Each futures contract of corn, on the other hand, represents 5,000 bushels – or about 127 metric tons of corn. 

[ Futures contracts are very similar to options contracts in that they both provide the right, but not obligation, to buy or sell a financial instrument at a specified date and price in the future. If you're interested in learning more about options trading, Investopedia's Options for Beginners Course provides a comprehensive overview with over five hours of on-demand video, exercises, and interactive content. You'll learn everything from what influences an option's price to advanced risk management strategies. ]

(Related: How Do Futures Contracts Work? - Video)

Some futures contracts call for physical delivery of the asset, while others are settled in cash. In general, most investors trade futures contracts to hedge risk and speculate, not to exchange physical commodities – that’s the primary activity of the cash/spot market.

The futures market is a major financial hub that supports intense competition between buyers and sellers and it also provides a center to manage price risk. It’s an extremely liquid market that comprises some of the most actively traded instruments in the world. The e-mini S&P 500, for example, is a stock index futures contract that has an average daily trading volume of more than 1.6 million contracts.

In general, futures trading is considered riskier than buying and selling stocks, primarily because of the leverage involved. Still, futures are popular trading instruments among a variety of market participants – from small retail traders to high frequency trading firms. If you are considering trading in the futures markets, it’s important that you understand how the markets works. Here’s a quick introduction to help you get started.