Futures

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.

A "future" is a tradable 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.Futures contracts are typically used for trading commodities (such as oil, gold, corn or even lean hogs) or foreign currencies.

For example, you might buy a contract to take delivery of 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 had risen to £1,400 by the time you took delivery in February, you would make a £4,000 profit on the iron by selling it for £14,000. If prices fall you'll lose money.

In reality, most traders never see the end product, as they will buy or sell a contract of identical size to close out their positions before the delivery date instead, futures offer a way to make bets with borrowed money on the direction of various prices. An "option" is similar to a future, but it gives the buyer the right, not the obligation, to buy (or sell) a certain asset at a specific price during the time of the contract. Both futures and options are types of "derivatives".

Watch Tim Bennett's video tutorial: What are futures?

Recommended

Price to sales ratio
Glossary

Price to sales ratio

A company's market cap divided by the company's annual sales (or revenue) gives us the price/sales ratio.
28 Aug 2020
Too embarrassed to ask: what is a p/e ratio?
Too embarrassed to ask

Too embarrassed to ask: what is a p/e ratio?

Find out how to use the price/earnings ratio (p/e ratio for short) – a useful starting place for investors looking to value a company.
26 Aug 2020
Stock split
Glossary

Stock split

A stock split increases the number of a corporation's issued shares by dividing each existing share.
21 Aug 2020
Economic indicators
Glossary

Economic indicators

An economic indicator is any statistic that allows us to analyse how the economy is performing or is likely to perform in future.
31 Jul 2020

Most Popular

Will a second wave of Covid lead to another stockmarket crash?
Stockmarkets

Will a second wave of Covid lead to another stockmarket crash?

Can we expect to see another lockdown like in March, and what will that mean for your money? John Stepek explains.
18 Sep 2020
Here’s why you really should own at least some bitcoin
Bitcoin

Here’s why you really should own at least some bitcoin

While bitcoin is having a quiet year – at least in relative terms – its potential to become the default cash system for the internet is undiminished, …
16 Sep 2020
James Ferguson: How bad data is driving fear of a second wave of Covid-19
UK Economy

James Ferguson: How bad data is driving fear of a second wave of Covid-19

Merryn and John talk to MoneyWeek regular James Ferguson about the rise in infections in coronavirus and what the data is really telling us.
17 Sep 2020