Futures

A futures contract is an agreement to buy or sell a specific asset at a fixed price on a specific date in the future. Unlike buying a stock, where you pay and own the shares right away, with futures you're locking in a price today for something that will actually change hands later — a stock index, a barrel of oil, a bushel of wheat, a currency, or a bond, among many other things.

Futures trade on an exchange in standardized sizes, meaning the contract specifies exactly how much of the asset is covered (say, 1,000 barrels of oil, or a fixed dollar multiple of a stock index) so that every contract of a given type is identical and can be freely bought and sold. When the contract's expiration date arrives, it's settled either by physically delivering the underlying asset (rare for most traders) or, more commonly for financial futures, by cash settlement — the difference between the agreed price and the actual market price is simply paid in cash.

The part that trips up beginners is that almost nobody holding a futures contract actually wants the wheat or the oil delivered to them. Most traders close out their position (take the opposite trade) before expiration, using futures purely to speculate on price direction or to hedge — offset risk they already have elsewhere, like an airline locking in fuel costs. Futures are also leveraged: you only put up a fraction of the contract's total value as margin, a deposit held by your broker, which means both gains and losses are magnified relative to the cash you've committed.

Because of that leverage and the fixed expiration date, futures behave differently from stocks in ways that matter day to day — they trade nearly around the clock on many exchanges, they can gap sharply overnight on news, and losses can exceed your initial deposit if the market moves hard against you.