Futures are financial contracts that commit the buyer to purchase, or the seller to sell, an asset at a set price on a future date. They’re used for hedging, speculation and price discovery — and they’re firmly at the complex, high-risk end of investing. Here’s how they work.
What is a futures contract?
A futures contract is an agreement between two parties to trade an asset at a future date, at a price agreed today. Unlike options, both parties are obligated to fulfil the contract.
- Standardised — fixed in quantity and delivery date, so they trade easily on exchanges.
- Margin — you put down a fraction of the contract’s value, which means built-in leverage.
- Settlement — by physical delivery or cash, depending on the contract.
Futures in the stock market
In equities, the main types are stock index futures (based on indices like the S&P 500) and single stock futures (based on an individual company’s shares). They let traders speculate on, or hedge against, price movements.
The risks — why caution matters
The same leverage that can amplify gains amplifies losses just as fast, and with margin you can lose more than your initial stake. Prices can be highly volatile, and contracts expire, so positions must be rolled or closed in time. For these reasons, futures are generally unsuitable for ordinary long-term retirement saving — most people building toward retirement will never need them, and they’re best understood before they’re ever used, if at all.
Futures play a real role in financial markets, but their complexity and risk profile put them well beyond what a typical buy-and-hold investor requires. This is general information to explain how they work — not a suggestion to trade them.