Futures

AAA

DEFINITION of 'Futures'

A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets.

Futures can be used either to hedge or to speculate on the price movement of the underlying asset. For example, a producer of corn could use futures to lock in a certain price and reduce risk (hedge). On the other hand, anybody could speculate on the price movement of corn by going long or short using futures.

INVESTOPEDIA EXPLAINS 'Futures'

The primary difference between options and futures is that options give the holder the right to buy or sell the underlying asset at expiration, while the holder of a futures contract is obligated to fulfill the terms of his/her contract.

In real life, the actual delivery rate of the underlying goods specified in futures contracts is very low. This is a result of the fact that the hedging or speculating benefits of the contracts can be had largely without actually holding the contract until expiry and delivering the good(s). For example, if you were long in a futures contract, you could go short in the same type of contract to offset your position. This serves to exit your position, much like selling a stock in the equity markets would close a trade.

VIDEO

Loading the player...
RELATED TERMS
  1. Domestic Box Office Receipt (DBOR) ...

    Futures contracts based on movie receipts at the box-office. ...
  2. Dojima Rice Exchange

    The world's first commodity futures exchange. Established in ...
  3. Commodity

    1. A basic good used in commerce that is interchangeable with ...
  4. Back Month Contract

    A type of futures contract that expires in any month past the ...
  5. Last Trading Day

    The final day that a futures contract may trade or be closed ...
  6. Hedge

    Making an investment to reduce the risk of adverse price movements ...
RELATED FAQS
  1. How can electricity be traded as a commodity by an individual investor?

    Electricity can be traded in the financial marketplace like any other commodity. Electricity futures trading offers an alternative ... Read Full Answer >>
  2. How are commodity spot prices different than futures prices?

    Commodity spot prices and futures prices are different quotes for different types of contracts. The spot price is the current ... Read Full Answer >>
  3. How do commodity spot prices indicate future price movements?

    Commodity spot prices indicate future price movements because commodity futures prices are calculated using spot prices. ... Read Full Answer >>
  4. What kinds of derivatives are traded on an exchange?

    There are many different types of derivatives traded on exchanges including options, futures, swaps and forward contracts. ... Read Full Answer >>
  5. What is the difference between notional value and market value?

    The notional value and market value describe the amount of a security. The notional value is the total value of options, ... Read Full Answer >>
  6. How can I trade in foreign futures?

    Trading in foreign futures takes place much like trading in domestic futures, except that transactions occur on specifically ... Read Full Answer >>
  7. What types of items can you buy futures for?

    When buying a future for an item, you enter into a futures contract. This financial contract obligates a buyer to secure ... Read Full Answer >>
  8. Why do futures' prices converge upon spot prices during the delivery month?

    It's a fairly safe bet that as the delivery month of a futures contract approaches, the future's price will generally inch ... Read Full Answer >>
Related Articles
  1. Options & Futures

    Introduction To Single Stock Futures

    These contracts allow for easier shorting, and provide more leverage and flexibility than stocks.
  2. Forex Education

    Getting Started In Foreign Exchange Futures

    Learn how these futures are used for hedging and speculating, and how they are different from traditional futures.
  3. Options & Futures

    Interpreting Volume For The Futures Market

    Learn how to read the volume reports, look at the relation to liquidity and interpret volume using open interest.
  4. Options & Futures

    Money Management Matters In Futures Trading

    Learn how this overlooked area of trading can help improve your gains.
  5. Options & Futures

    Are You Ready To Trade Futures?

    If you want to trade futures in the hopes that you'll become rich, you'll have to answer some questions first.
  6. Insurance

    Futures Fundamentals

    For those who are new to futures but want a solid understanding of them, this tutorial explains what futures contracts are, how they work and why investors use them.
  7. Investing Basics

    Understanding Total Return Swaps

    A total return swap is a contract in which a payer and receiver exchange the credit risk and market risk of an underlying asset.
  8. Fundamental Analysis

    Explaining Price Targets

    A price target is what an investment analyst projects a security’s future price to be.
  9. Investing Basics

    Understanding Buy Stop Orders

    A buy stop order is an order to buy a stock at a specific price above its current market price.
  10. Investing Basics

    Explaining Bond Ratings

    A bond rating is a grade given to a bond to indicate its creditworthiness.

You May Also Like

Hot Definitions
  1. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  2. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  3. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  4. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  5. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  6. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!