Futures are derivatives that obligate two parties, a buyer and a seller, to trade an asset at a set current price until a specific future date. The term derivatives refer to a financial contract that obtains value from underlying assets, commonly financial securities like stocks, bonds or commodities like oil or gold. It is an agreement where prices derive from their underlying assets.

Futures contracts lock in the current price of a commodity or stock and define the current fixed cost of the underlying asset and its expiry date. These contracts obligate the buyer to buy and the seller to sell, even if the price goes against the trade. As futures are leveraged, trades can become very profitable or incur a significant loss. Leverage means traders do not have to invest the full 100% of the underlying assets’ value of their own money in entering the trade but can instead use debt or borrowed money to do so. It can help to multiply their returns; however, it can also multiply losses if the trade isn’t successful. Usually, futures are traded on a futures exchange, for example, the Chicago Mercantile Exchange (CME), and require investors to have an approved brokerage account.