A futures contract is a standardised exchange-traded agreement whose value is linked to an underlying commodity, index, currency or other reference. It specifies the contract size, expiry and settlement process.

Futures can be used to hedge an existing exposure or speculate on a price change. They do not give the holder the same rights as owning a company's shares, and leverage can create substantial losses.

How a position gains or loses value

A trader buying a contract is long; a trader selling it is short. A long position generally gains when the futures price rises and loses when it falls. A short position has the opposite price exposure. Gains and losses are settled through the account under the clearing and broker arrangements.

Multiply the price change by the contract multiplier and number of contracts to calculate the price component of profit or loss. Then include costs. CME's calculation lesson provides a commodity example.

For a hypothetical ES position, a ten-index-point rise multiplied by $50 per point produces $500 per long contract before costs. A ten-point fall produces a $500 loss. The minimum tick and the index point are different units.

Margin makes exposure larger than the deposit

Futures margin is a performance bond, not payment for the full underlying exposure. CME's margin guide explains initial and maintenance requirements.

A broker can impose additional requirements and may liquidate under-margined positions. Losses can exceed the amount initially committed. A low intraday requirement does not establish that a small account is adequately funded.

Expiry and settlement

Some futures settle in cash; others have physical delivery procedures. An index future cannot deliver a basket of goods in the way a commodity contract can, but its precise cash settlement is still governed by the product rules.

A trader may close a position before expiry by making the offsetting transaction. Rolling means closing one expiry and opening another; it is not a free extension of the same contract. Broker deadlines may be earlier than exchange delivery or last-trading dates.

Check the exact product and exchange calendar. Nearly continuous weekday access does not remove holidays, maintenance, halts or product-specific schedules.

What do micro contracts change?

The paired Micro E-mini equity-index contracts use one-tenth of the corresponding E-mini multipliers. See CME's FAQ.

Smaller increments can help position sizing, but several micros can create the same exposure as a larger contract. They trade in separate order books and costs need not scale proportionately. “Micro” does not guarantee low risk or identical specifications across all products.

Before comparing futures with another market

Separate the instrument from the account arrangement. Trading your own futures brokerage account is different from a paid simulated prop evaluation. A reward from a programme does not automatically have the same tax treatment as a personally held futures contract.

For U.S. tax questions, qualifying Section 1256 contracts have specific rules described by the IRS Form 6781 guidance. A general article cannot promise that futures are tax-favoured for every reader.

Learn the specification and practise order entry before deciding whether to trade. Our beginner's preparation guide explains the next steps without assuming live trading is appropriate.

Risk Disclaimer: Trading involves substantial risk of loss. Past performance is not indicative of future results. See our full risk disclaimer.