What are futures and why do they attract investors in all markets

Have you ever thought about how companies protect themselves from sharp price fluctuations? If not, it’s time to get acquainted with futures—these are financial instruments that play a huge role in global financial markets. Futures are not just a way to make money; they are complex risk management tools that require a serious approach.

Futures are not just contracts: the essence of derivatives

At their core, futures are short-term agreements between two parties to buy or sell a specific asset on a set date at a pre-agreed price. It sounds simple, but in practice, it can be much more complicated than it seems.

The asset in such contracts can be almost anything: agricultural products (soy, wheat, coffee), natural resources (oil, gas), financial instruments (stocks, bonds, currencies), stock indices (S&P 500), as well as digital assets like Bitcoin. Each contract has clearly defined parameters: volume of the commodity, units of measurement, calculation method, and currency.

What sets futures apart from other financial instruments? Primarily, their standardization. All conditions are typical, ensuring transparency and liquidity in the market. The second feature is the exchange-based nature of trading. Unlike over-the-counter forward contracts, futures are traded on official exchanges, where each transaction is monitored and guaranteed by a clearinghouse.

Where futures are traded and who participates in this market

The futures market is a specialized exchange where thousands of transactions occur daily. According to the U.S. Commodity Futures Trading Commission (CFTC), the vast majority of participants are not individual investors but large producers, suppliers, logistics companies, and banks.

There are three main groups in the futures market: hedgers—real companies that need these goods for their operations and try to lock in prices; speculators—traders betting on price movements to make a profit; and arbitrageurs—those seeking price differences between various markets.

All commodity futures and options must be traded exclusively through exchanges and brokers registered with the CFTC. This guarantees a certain level of protection for participants and oversight of market activities.

How futures work: practical examples

Let’s consider a specific example with aviation kerosene. An airline knows it will need a large amount of fuel next quarter. Prices are volatile, and unexpected increases could blow the budget. The solution: the airline enters into a futures contract to buy 1 million gallons of aviation kerosene at a fixed price of $3 per gallon with delivery in 90 days.

On the other side is a fuel distributor, who is directly interested in lowering prices and enters into a selling contract. Both parties achieve their goals: the airline secures stable expenses, and the distributor hedges against unexpected price drops. Both use futures as a risk management tool.

But not all participants want physical delivery of the commodity. Speculators simply profit from changes in the contract’s price. If the price of aviation kerosene rises, the futures contract becomes more expensive, and the speculator can sell it for a profit without dealing with actual fuel delivery. It is precisely speculation that creates sufficient trading volume and liquidity in the market.

Applying futures in stock and index trading

Futures are not limited to commodities. Increasingly popular are futures on individual company stocks, exchange-traded funds (ETFs), and especially stock indices.

A portfolio manager worried about a market downturn can sell an S&P 500 futures contract without coverage. If stocks fall, the trader profits from the short position, offsetting losses in their main portfolio. Conversely, an optimistic investor can buy a long contract, gaining the ability to manage a large position with relatively little capital.

This brings us to one of the main attractive features of futures—the ability to use leverage. An investor can control large sums by investing only a small part of the contract’s value as a margin deposit.

Margin and leverage: why risk is the main enemy of beginners

This is where the serious side of futures begins. Many beginners lose money here.

Imagine: you deposit $5,000 as margin. Your broker allows you to use 10:1 leverage, meaning you can trade a position worth $50,000. It sounds great until prices move in your favor. But if the price shifts just 5% against you, your position will lose $2,500—that’s 50% of your initial capital.

With 20:1 leverage, the same 5% move against you results in losing all $5,000. And you could lose even more—known as a “margin call” or “losses exceeding margin.”

The CFTC repeatedly warns: futures are extremely complex and volatile instruments, not recommended for retail individual investors. Margin and leverage rules in futures trading are much more liberal than in regular stock trading, where maximum leverage is limited to 2:1.

The key to success in futures trading is discipline. You need iron will not to take excessive risks, clear rules for limiting losses, and a cool head.

Standardized contracts: what you need to know

Each futures contract is a standardized document with clearly defined conditions. The contract specifies:

• The underlying asset and its characteristics (e.g., octane number of gasoline or purity of gold)
• Delivery volume or settlement size
• Price measurement units (e.g., cents per bushel)
• Settlement currency
• Contract expiration date
• Execution method: physical delivery or cash settlement

This is critically important for beginners: if you forget the expiration date of a live cattle contract, you risk ending up with a “pig in a poke”! Most retail traders close their positions well before expiration for this reason.

How to start trading futures: a step-by-step guide

If you are attracted to futures despite all the risks, here’s how to start properly:

First step—choose a broker. A futures broker must be registered on their market. The broker will ask about your investment experience, income, and own capital—this is to assess your risk tolerance.

Second step—carefully study the fee structure. There is no industry standard. Some brokers provide extensive research and consulting, others only quotes and charts.

Third step—begin with paper trading. This is virtual trading with simulated money on a demo account. There is no real risk here, but it mimics real trading: all commissions, margin, and leverage are calculated as if real. Spend at least a few months on a virtual account. Even experienced traders use paper accounts to test new strategies.

Fourth step—when ready, open a real account with a minimal deposit. Do not risk large sums immediately.

Futures are a tool that requires respect, knowledge, and a sensible approach. For some, they become an effective way to manage risks; for others, a way to profit through speculation. But for everyone, they demand seriousness and competence.