Futures are standardized exchange-traded contracts that create exposure to the future value of an underlying asset or index. Traders post margin rather than paying the entire notional value, so price changes are magnified relative to cash committed.
How it works
A futures contract specifies the contract size, tick value, expiration, trading hours, and settlement method. Gains and losses are generally marked to market as prices change, affecting the margin account.
Some commodity contracts can result in physical delivery, while equity-index and many financial futures settle in cash. Traders often close or roll positions before expiration.
Why it matters
The biggest beginner error is treating margin as the size of the investment. The economic exposure is the contract's notional value, which can be many times larger than the cash posted as margin.
Futures can be efficient for hedging and asset allocation, but the same leverage that makes them efficient can force losses to be realized before a long-term thesis has time to recover.
A simple market example
WTI crude futures on March 9, 2026 showed why the contract structure matters. CME reported that the front-month contract traded as high as roughly $119 per barrel and as low as about $81 during the same session, a record $38 intraday range. A trader with a modest cash balance could still control a much larger crude-oil notional position through futures margin. In that environment, the relevant question was not simply 'will oil be higher in a month?' but whether the account could survive the mark-to-market swings before that view played out.
Common mistakes
Treating posted margin as the maximum amount at risk. The notional exposure can be much larger.
Ignoring expiration and assuming one futures contract can be held indefinitely like common stock.
Frequently asked questions
Why are futures leveraged?
Because the trader posts performance margin rather than paying the full notional value of the contract.
Do all futures deliver a physical commodity?
No. Many financial futures settle in cash, while some commodity futures have delivery mechanisms.
Why can futures differ from spot prices?
Financing, storage, convenience yield, supply-demand conditions, and time to expiration can create a basis between futures and spot.
Educational content only. Definitions describe common market usage and may vary by jurisdiction, instrument, or institution.