FUTURES TRADING ESSENTIALS
What is a Futures Contract?
A futures contract is a standardized agreement traded on a regulated futures exchange to buy or sell an underlying asset (such as a commodity or index) at a specified price on a future date. Each futures contract has defined specifications: contract unit, tick size, tick value, trading hours, expiration, and settlement, so all participants know exactly what is being traded.
Commodity futures are used by both hedgers (seeking price protection) and speculators (seeking market gains). Positions can be long (benefit if prices rise) or short (benefit if prices fall).
Investing in futures contracts are based upon margin requirements, which function as a performance bond. Each futures contract will have its own margin requirement (investment amount) which can vary depending on how long the position is held for.
At a Glance: Common Futures Contract Examples
| Futures Contract | Underlying / Unit | Tick Size | Tick Value | Settlement at Expiration |
|---|---|---|---|---|
| Crude Oil (CL) | WTI / 1,000 Barrels | $0.01 per Barrel | $10.00 | Physical Delivery |
| Gold (GC) | Gold / 100 Troy Oz. | $0.10 per Oz. | $10.00 | Physical Delivery |
| E-mini S&P 500 (ES) | S&P 500 Index / $50 x Index | 0.25 Points | $12.50 | Cash Settled |
Figures are examples only. Contract specifications are set by the futures exchanges (e.g., CME Group) and are subject to change.
Have Questions?
We’re here to help – Connect with a licensed futures broker now.
Key Components of a Futures Contract
• Standardization: Exchange-defined specs (unit, tick size/value, trading hours, expiration, settlement).
• Margin: Performance bond posted to open/maintain positions (not a loan).
• Long & Short: Make directional trades; profits/losses are marked to market daily.
• Expiration & Rollover: Contracts expire; traders can roll to a later month to maintain exposure.
• Settlement at Expiration: Cash-settled (indexes) or physical delivery (many commodities), per contract specs. Positions can be liquidated prior to the expiration date.
• Exchange & Clearing: Centralized marketplace with clearinghouse managing performance and daily P&L.
Simple Trade Example
If a trader buys one Crude Oil (CL) futures contract and price rises by $0.10, that’s 10 ticks; with a tick value of $10 per tick, the move equals $100 in profit (before commissions & associated trade fees). If prices fall by $0.10 instead, the P&L impact would be a $100 loss.
Frequently Asked Questions
Q: What is the purpose of a futures contract?
A: To provide standardized, exchange-traded exposure for hedging and speculation with transparent pricing and centralized clearing.
Q: Do I have to take delivery?
A: No. Many contracts are cash-settled; for deliverable contracts, most traders offset or roll positions before delivery periods.
Q: How are gains and losses realized?
A: Futures are marked to market daily. Profits & losses are credited or debited based on that day’s price change and the contract’s tick value.
Q: Who sets contract specifications?
A: Futures exchanges (such as the CME Group) publish and update contract specs, including tick size, trading hours, and settlement method.
Continue Your Futures Trading Education
Explore additional beginner futures trading guides, contract explanations, trading tutorials and educational resources in our Futures Trading Education Center.
Ready to Start Trading Futures?
Take the next step and open your futures trading account to discover low day-trade margins, exchange-direct order routing and professional support with Insignia Futures & Options.
