What Are Futures? Definition and Examples
Understanding Futures Markets and Futures Contracts
Futures are a popular day trading market. Futures contracts are how many different commodities, currencies, and indexes are traded, offering traders a wide array of products. Futures don't have day trading restrictions like the stock market.
Traders can buy or sell a futures contract anytime the market is open. Futures traders also aren't required to have $25,000 in their account for day trading—the capital requirement for day trading stocks in the U.S. Here's what futures contracts are, how they work, and what you need to start trading them.
What Are Futures?
Futures markets trade futures contracts. A futures contract is an agreement between a buyer and seller of the contract that some asset—such as a commodity, currency or index—will be bought or sold for a specific price, on a specific day, in the future (the expiration date).
For example, if someone buys a July crude oil futures contract (CL), they are saying they will buy 1,000 barrels of oil from the seller at the price they pay for the futures contract upon the July expiration. The seller is agreeing to sell the 1,000 barrels of oil at the agreed-upon price.
For example, a grain farmer might sell a futures contract to guarantee that he receives a certain price for his grain, or a livestock farmer might buy a futures contract to guarantee that she can buy her winter feed supply at a certain price. Either way, both the buyer and the seller of a futures contract are obligated to fulfill the contract requirements at the end of the contract term.
Day Trading Futures
Day traders don't trade futures contracts with the intent of actually taking possession of (if buying) or distributing (if selling) the physical barrels of oil. Rather, day traders make money on the price fluctuations that occur after taking a trade, by means of a cash settlement agreement, where money exchanges hands instead of goods.
For example, if a day trader buys a natural gas futures contract (NG) at $2.065, and sells it later in the day for $2.105, they made a profit. The price of a futures contract is constantly moving as new buy and sell transactions occur.
Futures contracts are traded by both day traders and longer-term traders, as well as by non-traders with an interest in the underlying commodity.
Day traders are not so concerned about these obligations because they do not hold the futures contract position until it expires. All they have to do to realize a profit or loss on their position is to make an offsetting trade. For example, if they buy 5 futures contracts, they need to sell those 5 futures contracts for more before they expire.
Futures contracts are traded on a futures exchange, like the Chicago Mercantile Exchange (CME) or Intercontinental Exchange (ICE).
Popular Futures Markets and Symbols
Popular index futures, currency futures, and commodity-related contracts include:
- E-mini S&P 500 index futures traded on the CME (ES)
- E-mini Dow Jones Industrial Average futures traded on the CME (YM)
- Euro to U.S. Dollar futures on the CME (6E)
- British Pound to U.S. Dollar futures on the CME (6B)
- 100 troy ounces Gold futures on CME (GC)
- 5,000 troy ounces Silver futures on CME (SI)
- 1,000 barrels crude oil futures on CME (CL)
The symbol for the contracts is followed by another letter and number. The letter represents the month the futures contract expires, and the number represents the year of expiration. For example, ES contracts expire in March (code H), June (M), September (U), and December (Z).
For example, an ES contract that expired in December of 2019 would have had a symbol like this: ESZ9. Some brokers and chart platforms may show the last two digits for the year (ESZ19).
How Futures Contracts Move
A tick is the minimum price fluctuation a futures contract can make. The tick size varies by the futures contract being traded. For example, crude oil (CL) moves in 0.01 increments (tick size), while the E-mini S&P 500 (ES) moves in 0.25 increments.
Each tick of movement represents a monetary gain or loss to the trader holding a position. How much each tick is worth is called the tick value. Tick values also vary by contract. For example, a tick in a crude oil contract (CL) is $10, while a tick of movement in the E-mini S&P 500 (ES) is worth $12.50, per contract.
To find out the tick size and the tick value of a futures contract, read the contract specifications for the contract, as published on the exchange the futures contract trades on.
Fees and Capital Required for Day Trading Futures
Trading a futures contract requires the use of a broker. The broker will charge a fee for the trade, called a commission. Day traders want a broker that provides them with low commissions, since they may only be trying to make several ticks on each trade.
Unlike stocks, futures day traders aren't required to have $25,000 in their trading account. Rather, they are only required to have an adequate day trading margin for the contract they are trading (some brokers demand a minimum account balance greater than the required margin).
Margin is the amount a trader must have in their account to initiate a trade. Margins vary by contract and broker. Check with your broker to see how much capital they require to open a futures account ($1,000 or more is usually required).
Then check what their margin requirements are for the futures contract you want to trade. This will let you know the bare minimum of capital needed. However, you might want to trade with more than the bare minimum you need, to accommodate for losing trades and the price fluctuations that occur while holding a futures position.
The National Futures Association (NFA) offers some helpful advice on trading futures. While futures contracts function differently, they are no less volatile than the stock market. If you don't have capital that you can stand to lose, reconsider trading futures. And whatever you do, always evaluate your risk tolerance before investing.
The Bottom Line
Futures are a popular day trading market because traders can access indexes, commodities, and/or currencies. Futures contracts enable traders without the financial means, logistic capability, or desire to trade in physical commodities to be able to do so. However, they still come with lots of risk, and beginner investors should be mindful of the volatility the market could experience.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
FINRA. "Day-Trading Margin Requirements: Know the Rules." Accessed May 19, 2020.
Commodity Futures Trading Commission. "Basics of Futures Trading." Accessed May 19, 2020.
CME Group. "Micro E-mini Futures Products Overview." Accessed May 19, 2020.
CME Group. "Tick Movements: Understanding How They Work." Accessed May 19, 2020.