What Are Futures? Futures Contracts Explained Simply for Beginners
A futures contract is an agreement to buy or sell an asset in the future at a price agreed on today. Here's how it works and why it's a higher-risk instrument.
What it is
A futures contract is an exchange-traded contract: one side commits to buy, the other to sell an asset on a certain date at the trade price. You don't need to put up the full amount — collateral, called initial margin, is enough. That's why futures work like a leveraged trade.
Types
| Type | Key feature |
|---|---|
| Dated | Has an expiration date |
| Perpetual | No date; instead there's funding — in crypto |
| Cash-settled / physically settled | Closes in money or in the asset |
Example
A contract for 1,000 units of an asset at a price of 10 is a 10,000 position. The collateral is, say, 1,500. If the price falls 5%, the loss is 500 — a third of the collateral. Hence the main rule: small size and a mandatory stop-loss.
How futures differ from buying the asset itself is covered in spot vs. futures, and leverage in leverage explained simply.
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- A futures contract is an obligation to buy or sell in the future.
- Collateral is smaller than the position — that's leverage.
- A stop-loss is mandatory, and size should be small.
Frequently asked questions
Can I trade a falling market with futures?
Yes, selling a futures contract (going short) is as easy as buying. But the risk of loss if the price rises is just as real.
Do I have to hold a futures contract until expiration?
No. Most traders close the position earlier simply by making the opposite trade.
Are futures suitable for beginners?
Only after learning the basics and practicing with small size. Because of leverage, losses grow fast.
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