What Are Futures? A Plain-English Introduction

Futures are one of the oldest and most widely traded financial instruments. They let farmers, airlines, banks and individual traders buy or sell exposure to stock indexes, oil, gold, interest rates and currencies through a single, standardized contract. This lesson explains what a futures contract is, how money changes hands, and why so many short-term traders use futures instead of stocks or ETFs.

Key points

• A futures contract is an agreement to buy or sell a set amount of something at an agreed price on a future date.
• The exchange standardizes everything except price, so millions of contracts can trade on one order book.
• Each contract has a multiplier, so every point of price movement is worth a fixed number of dollars.
• Accounts are marked to market daily: gains are paid in and losses are taken out every trading day.
• You can go short as easily as you go long.
• Most speculators close or roll a position long before expiry, and physically delivered contracts must be closed before delivery.

The basic idea

A futures contract is an agreement to buy or sell a set amount of something (an index, a barrel of oil, an ounce of gold) at an agreed price on a set future date. Every detail except price is standardized by the exchange: the quantity, the quality, the expiry date and how the contract settles. That standardization is what lets buyers and sellers who have never met trade with each other on one electronic order book.

In the US, most actively traded futures are listed by CME Group, which runs the CME, CBOT, NYMEX and COMEX exchanges. Trades go through a clearing house, which stands between the buyer and the seller. If the person on the other side of your trade cannot pay, the clearing house still honors the contract. This is one reason futures markets require margin deposits, covered in a later lesson.

Contract size and the multiplier

Every futures contract has a multiplier that converts the price into dollars. The E-mini S&P 500 (ES) is $50 times the S&P 500 index. The Micro E-mini S&P 500 (MES) is $5 times the index, one-tenth the size. Crude oil (CL) is 1,000 barrels, so each $1.00 change in the price per barrel is worth $1,000 per contract.

Worked example: what one contract controls

Suppose the S&P 500 futures price is 6,000.00. The notional value, or total exposure, of one contract is:

• ES: 6,000 × $50 = $300,000
• MES: 6,000 × $5 = $30,000

You do not pay that amount to open the trade. You post margin, a much smaller deposit. But your profit and loss is based on the full notional value, which is why futures are leveraged. You can check the exposure of any contract with our contract value calculator.

How a trade makes or loses money

Profit or loss on a futures trade is the price change multiplied by the multiplier and the number of contracts.

Worked example: a long trade

You buy 1 MES at 6,000.00 and later sell it at 6,010.00. The price rose 10 points. Your result is 10 × $5 × 1 = $50 before commissions and fees. The same 10-point move on one ES would be 10 × $50 = $500.

Worked example: a short trade

You sell 1 Micro E-mini Nasdaq-100 (MNQ) at 21,000.00 because you expect the price to fall. You buy it back at 20,950.00. The price fell 50 points. MNQ is $2 per point, so your profit is 50 × $2 = $100. If the price had risen 50 points instead, you would have lost $100. On the full-size NQ at $20 per point, the same move is $1,000.

Who uses futures

Hedgers use futures to reduce price risk in their business. An airline that needs fuel might buy oil futures. If oil rises $5 a barrel, each CL contract gains $5 × $1,000 = $5,000, which offsets part of the higher fuel bill. A farmer might sell grain futures to lock in a price before harvest.

Speculators have no business need for the underlying product. They try to profit from price changes and supply much of the day-to-day trading volume. Most retail traders and prop firm traders are speculators.

Daily settlement (mark to market)

Futures accounts are settled every day. At the end of each session the exchange sets a settlement price. If your open position gained value since the previous settlement, cash is added to your account. If it lost value, cash is taken out. With stocks, an unrealized loss stays on paper until you sell. With futures, it is real cash leaving your account each day.

Worked example: two days of settlement

You buy 1 ES at 6,000.00 and hold it.

• Day 1 settles at 6,012.00: +12 points × $50 = +$600 credited.
• Day 2 settles at 5,995.00: −17 points × $50 = −$850 debited.

Net so far: −$250, which is exactly (5,995 − 6,000) × $50. Daily settlement does not change your total result. It changes when the cash moves, which matters if your account balance runs low.

Long and short are equally easy

In futures, you can sell a contract you do not own as easily as you can buy one. There is no borrowing of shares and no separate short-sale rule. Going short means you profit if the price falls and lose if it rises. Losses on a short position have no fixed upper limit, so a stop order matters just as much as on a long trade.

You rarely hold to expiry

Each futures contract has an expiry date. Speculators almost always close or roll a position before then. Equity index futures such as ES and NQ are cash-settled: at expiry, open positions settle to a final price and no shares change hands. Contracts such as crude oil (CL) and gold (GC) are physically delivered, which is why brokers and prop firms close those positions before the delivery period begins. Rolling is covered in Futures Rollover and Expiration.

Why traders choose futures

• Nearly 24-hour trading on most CME products, Sunday evening to Friday afternoon.
• Capital efficiency: margin lets you control large exposure with a smaller deposit.
• Simple shorting with no borrowing.
• Central order book: everyone trades on the same exchange, with published volume.
• Small sizes available: micro contracts let you trade at one-tenth of E-mini size.

The downsides are real too. Leverage magnifies losses as much as gains, losses are settled in cash daily, and fast markets can move through your stop. Many beginners lose money. Practice with small size, or in a simulator, before risking more.

How to start

To trade futures with your own money, you need an account with a futures broker. You can compare costs and platforms on our futures broker rankings, for example NinjaTrader or Tradovate. Another route is a prop firm evaluation, where you pay a fee to trade a simulated account under set rules. These are explained in How Prop Firm Evaluations Work.

Next lesson

To trade any contract you need to know exactly what each price move is worth. That is covered in Futures Contract Specs Explained: Tick Size, Tick Value and Point Value.

Frequently asked questions

Do I have to take delivery of oil or gold?

No, if you close or roll your position before the delivery period. Retail brokers and prop firms close physically delivered positions before delivery, so speculators do not receive the commodity.

How much money do I need to trade futures?

It depends on the broker's margin and your risk per trade. Some brokers list day-trade margins as low as $50 for one MES, but you need enough capital to absorb losses, not just to open the trade.

Are futures riskier than stocks?

Futures are leveraged, so a small price move creates a large gain or loss relative to the money you put up. With correct position sizing, risk can be controlled, but leverage makes mistakes more costly.

What is the difference between ES and MES?

Both track the S&P 500. ES is $50 per index point and MES is $5 per point, one-tenth the size.

Can I lose more than my account balance?

Yes. In a fast market, losses can exceed the money in your account, and you would owe the difference to your broker. Stops and sensible position sizes reduce this risk but do not remove it.