What is a futures contract?

Trading futures can be a great way to generate short term income or long term wealth, so what is a futures contract? This is a contract between two separate parties to either buy or sell a particular asset at a specified price in the future which is agreed upon today. There are many different types of assets that futures contracts are applied to including currency, commodities, indices, individual stocks and much more.

You may ask yourself, how can a futures contract benefit me if I want to make money today? This is where anticipation comes in, with the ability to anticipate the potential moves in a market you can speculate the future cost and purchase today at a lesser cost or sell today at a more expensive cost. This is very similar to most other asset classes such as equities, forex etc.... One of the major differences with futures is that the contract in which you purchase or sell will at one point expire; this is known as the "contract expiration" date. As a contract expires, you may rollover into the same asset with a "future" expiration date. When this takes place you are forced to accept your gain/loss or the asset itself according to the exact price you purchased in relation to the current price. Take for example if you purchased a futures contract at 1000 with the anticipation it will go higher, then at expiration if you have not sold or closed the contract out you must take possession of the cattle you purchased in the contract at the agreed upon price (if current price is 1100, you pay only the 1000). Don't let that scare you; it is not required to let the contract expire. In fact it is quite the opposite! You can exit your position at anytime even if it is within minutes!

As a day trader there is no reason to concern yourself with the expiration until you are close to that time. There is a lot of complexity and controversy around “what is a futures contract”, so we need to simplify what they are & how we can use them to make money. The process of placing trades for futures is no different than an individual stock or forex pair. You are anticipating the future move whether up or down; if you expect the price of that instrument to go higher you would BUY (go long), and if you are expecting price to go lower you would SELL (go short).