Translation: Futures Contracts = Futures Contracts

Futures contracts are agreements between two parties to buy or sell an asset on a future date at a price set today.

Simple definition: Put simply, you agree on the price today and face the outcome of that agreement in the future.

Note: You usually don’t pay the full value of the contract when you enter into it. Instead, you deposit an amount as collateral, called margin. This means the contract can give you exposure to a value greater than the amount you deposited. However, be mindful of the risks: if the price moves against your expectations, losses can mount quickly, and you may be asked to deposit additional funds to cover them.

Example: Imagine that oil is priced at $70 today, and you expect its price to rise. You could enter into a futures contract agreeing today to buy oil in three months for $72. If the price is $80 at that time, the $8 difference is in your favor. But if the price falls to $65, the $7 difference is against you.

What does this mean for you?

  • Hedging: Futures contracts can be used to reduce the impact of price changes—for example, to protect a company concerned about rising oil costs in the future.
  • Speculation: They allow you to try to profit from market movements, whether prices rise or fall.
  • You don’t have to own the asset: Futures contracts don’t always mean you intend to own the asset itself. Sometimes the goal is simply to protect a company from price fluctuations or to benefit from market movements.

Frequently asked question: Do I have to pay the full value of a futures contract when I sign it?

Answer: No. You usually don’t pay the full value of the contract when you enter into it. Instead, you deposit a portion of the value as collateral, called margin. This gives you greater financial exposure relative to the amount deposited, but it also magnifies both potential gains and losses.