A futures contract is a standardised agreement to buy or sell an asset at a set price on a future date. Traders rarely take delivery. They buy or sell the contract and close it before expiry, profiting or losing on the price change. You post a small deposit called margin, and gains and losses are settled in your account every day, which creates built-in leverage and can lead to losses larger than your deposit.
Futures look complicated because of the vocabulary. The mechanics are simple once you see one worked through. This guide explains what a futures contract is, how profit and loss are calculated, what margin does, and the risks that catch beginners out.
What a futures contract is
A futures contract is an agreement made on an exchange to buy or sell a fixed quantity of something at a price agreed today, with settlement on a set future date. The "something" can be a stock index, oil, gold, a currency or a government bond. Because every contract of a type is identical and traded on an exchange, you can buy and sell them as easily as shares.
Most retail traders never take delivery. They open a position, and close it by making the opposite trade before expiry. Index futures settle in cash, so there is nothing to deliver at all.
Three numbers that define every contract
| Term | Meaning | Example (E-mini S&P 500) |
|---|---|---|
| Tick size | The smallest price move | 0.25 index points |
| Tick value | Money gained or lost per tick | $12.50 |
| Point value | Money per full point | $50 |
The micro version of the same contract is one tenth of the size: $5 per point. Always check the exact specification on the exchange's website before trading, as exchanges can change them.
Score the Setup Before You Take It
TRADZY's Void Engine rates any setup 0–100 across 12+ variables: structure, trend alignment, volume, momentum and key levels.
Score a Setup Free →A worked example
Say the S&P 500 E-mini future trades at 5,000 and you think it will rise.
- Buy 1 contract at 5,000. The contract controls 5,000 × $50 = $250,000 of index exposure.
- You post margin, a performance deposit that is a small fraction of that value. The amount is set by the exchange and your broker and changes with volatility.
- The index rises 20 points to 5,020. Your gain is 20 × $50 = $1,000.
- If it had fallen 20 points to 4,980, your loss would be $1,000.
The margin is not a fee, and it is not the maximum you can lose. A move of a few percent can wipe out the deposit, and a very large move can cost more than you put up.
Margin and daily settlement
Futures are marked to market every day. Gains are added to your account and losses are taken from it at the end of each session. If your balance falls below the required level, you get a margin call and must add money or have positions reduced. This daily settlement is why futures are leveraged: you control a large value with a small deposit, and your results are magnified in both directions. See margin trading.
Expiry and rolling
Each contract has an expiry date. Index futures typically expire quarterly (March, June, September, December). If you want to keep a position, you roll it by closing the near contract and opening the next one. Most trading volume sits in the nearest contract, so that is the one most traders use.
Who uses futures
- Hedgers such as farmers, airlines and fund managers, who lock in a price to reduce risk.
- Speculators, including day traders and prop firm traders, who take on risk for profit.
- Arbitrageurs, who exploit price gaps between related markets.
Why traders like them, and what to watch
Advantages: nearly 24-hour trading on many contracts (see futures trading hours), deep liquidity, easy shorting, standard contract sizes and transparent pricing.
Risks:
- Leverage cuts both ways. Losses can exceed the deposit.
- Overnight and weekend gaps can jump past your stop.
- Costs add up from commissions, exchange fees and data.
- Size mistakes are the main killer. Work out the dollar risk per contract before you click. See position sizing.
Start on a simulator or with micro contracts, and keep a journal of every trade. See paper trading and what is futures trading.
FAQ
How do futures work in simple terms?
You agree today on a price for an asset to be bought or sold later. You put down a small deposit (margin), and your account gains or loses as the price moves, settled daily. You usually close the position before expiry.
Do you have to take delivery of futures?
Usually not. Most traders close their positions before expiry, and index futures are settled in cash.
Can you lose more than you invest in futures?
Yes. Because of leverage, a large adverse move can lose more than your margin deposit. Use stop-losses and small position sizes.
What is the difference between futures and stocks?
Stocks are ownership in a company with no expiry. Futures are contracts with an expiry date, with leverage built in and daily settlement of gains and losses.
What are micro futures?
Smaller contracts, typically one tenth of the standard size, with lower margin and smaller dollar risk per point. They are a common starting point for beginners.
Put This Into Practice
- Score your next setup 0–100 with the Void Engine before entering
- Log the trade and tag the setup in the TradLog
- Review weekly: keep what pays, cut what doesn't
Start Free in TRADZY →
Educational content, not financial advice. Trading involves substantial risk of loss.