Futures are contracts to buy or sell a specific underlying asset at a future date. The underlying asset can be a commodity, a security, or other financial instrument. Futures trading requires the buyer to purchase or the seller to sell the underlying asset at the set price, whatever the market price, at the expiration date.

Futures contracts lock in the current price of a commodity or stock and define the current fixed cost of the underlying asset and its expiry date. These contracts obligate the buyer to buy and the seller to sell, even if the price goes against the trade. As futures are leveraged, trades can become very profitable or incur a significant loss. Leverage means traders do not have to invest the full 100% of the underlying assets’ value of their own money in entering the trade but can instead use debt or borrowed money to do so. It can help to multiply their returns; however, it can also multiply losses if the trade isn’t successful. Usually, futures are traded on a futures exchange, for example, the Chicago Mercantile Exchange (CME), and require investors to have an approved brokerage account.

There are several advantages to futures trading, including higher leverage and lower trading costs. A corporate entity can hedge prices of their raw material supply needs to lock in current prices, whereas individual investors can profit from price movements of underlying assets.

However, futures trading does come with higher risks and isn’t well-suited for beginner investors. Due to leverage, which means using debt or borrowed money for trading, investors risk losing more money – profits are amplified, but so are losses. This guide will explain the basics, including what futures are, how they work, and its benefits and risks.