A future is a tradeable contract that commits you to taking delivery (if you buy), or making delivery (if you sell), of an agreed amount of something at an agreed time. For example, you might buy a contract for ten tons of iron at £10,000 on a date in February.
If you pay a 10% deposit on the iron (£1,000) to secure the contract and if the price per ton rose in February to £1,400, you would make a £4,000 profit on the iron by selling it for £14,000. If prices fall you’ll lose money. Futures contracts are used for trading commodities or foreign currencies.
Most traders never see the product as they will buy or sell a contract of identical size to close out their positions before the delivery date.
• Watch Tim Bennett’s video tutorial: What are futures?