Futures

Futures are standardized derivative contracts that obligate parties to buy or sell an asset at a predetermined price on a specific future date. Unlike options, which give the holder a right but not an obligation, futures contracts must be fulfilled. Futures trade on exchanges and cover a wide range of assets including commodities, currencies, stock indices, and interest rates. Futures were originally developed to help farmers and buyers manage price risk. A wheat farmer might sell futures contracts at planting time to lock in a price for the harvest, protecting against a price drop. A bread company might buy futures to lock in wheat costs, protecting against a price increase. This hedging function remains important today. Speculators also trade futures to profit from price movements. Because futures require only a small initial margin deposit rather than the full contract value, they offer significant leverage. This leverage amplifies both gains and losses, making futures trading risky for inexperienced investors. Futures contracts have standardized terms including the quantity of the underlying asset, the delivery location, and the expiration date. When a contract expires, it can be settled by physical delivery of the asset or, more commonly, by cash settlement based on the final price. Most individual investors encounter futures through index futures like S&P 500 futures, which trade around the clock and provide a preview of how the stock market might open. Financial media often report on "futures" pointing to a higher or lower open based on overnight trading in these contracts. Futures markets serve important economic functions. They help producers and consumers manage risk, provide price discovery for commodities, and offer liquidity for hedgers and speculators. However, the leverage and complexity involved make futures unsuitable for most individual investors without significant knowledge and experience.