How trading futures actually works

How Trading Futures Actually Works Futures trading is one of the oldest and most dynamic parts of the financial markets. It allows traders and institutions to speculate on or hedge against future price movements of commodities, indices, currencies, and more. But how does it actually work? At its core, a futures contract is an agreement between two parties to buy or sell an asset at a predetermined price on a specific future date. Unlike spot trading — where you exchange the asset immediately — futures are all about anticipating where the price will be later. 1. The Mechanics When you enter a futures position, you don’t pay the full contract value. Instead, you post a margin, which acts as collateral. This margin can be as low as 5–10% of the contract’s total value, giving you leverage — both a benefit and a risk. Your position is marked-to-market daily, meaning profits and losses are settled each day. If the market moves against you, you might receive a margin call requiring additional funds to keep the position open. 2. Hedging vs. Speculating Hedgers use futures to protect against price volatility. For example, a farmer might lock in a price for wheat before harvest. Speculators, on the other hand, aim to profit from price changes. They rarely intend to take delivery of the underlying asset. 3. Expiration and Settlement Each futures contract has an expiration date. Some contracts settle in cash, while others require physical delivery of the asset. Most traders close their positions before expiration to avoid this. 4. The Role of Exchanges Futures are traded on regulated exchanges like the CME Group, ensuring transparency, liquidity, and standardized contracts. Clearinghouses guarantee that both parties honor their obligations. 5. Why It Matters Futures markets play a crucial role in global finance by improving price discovery, offering risk management tools, and enhancing market efficiency. However, because of leverage, they also carry significant risk — making education and discipline essential.