CFDs are complex financial instruments and carry a high level of risk due to leverage. A significant proportion of retail investors incur losses when trading leveraged products such as CFDs. You should carefully consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your capital.
A futures contract is a standardized agreement to buy or sell an asset at a fixed price on a future date. Unlike forwards (which are negotiated privately between parties), futures are traded on regulated exchanges. A clearinghouse ensures that both parties fulfill their obligations, eliminating counterparty risk.
Futures contracts have three characteristics that set them apart from forwards and other derivatives. They are standardized: the exchange defines the quantity, quality, and expiration date. They are liquid: since they are traded on an exchange, you can enter and exit positions without having to find a counterparty. And they are guaranteed: the clearinghouse ensures fulfillment.
This structure makes them one of the most widely used instruments for both hedging and speculation in commodities, indices, currencies, and interest rates.
Futures do not require full payment when opening a position. The trader deposits an initial margin (a fraction of the value) as collateral. This introduces leverage.
The initial margin is the minimum deposit required to open a position. The maintenance margin is the minimum level that must be maintained in the account. If losses reduce the balance below the maintenance level, the broker issues a margin call demanding additional funds.
Each day, the exchange adjusts accounts based on price movements. If the market moves in your favor, the profit is credited. If it moves against you, the loss is debited to you. This process is called mark -to-market.
The process follows steps defined by the market’s structure.
Choose the contract. Asset, expiration month, and contract size are as specified by the exchange.
Deposit the margin. A percentage of the total value, generally between 5% and 15%.
Monitor the position. Daily settlement adjusts your balance in real time.
Close or let it expire. You can sell the contract before expiration or wait for the final settlement (physical or cash).
Most traders close their positions before expiration. Physical delivery is prohibited in financial markets.
A trader buys a futures contract on an index at 4,000 points. Each point is worth 10 USD. The total value of the contract is 40, 000 USD. They deposit a 10% margin: 4,000 USD. If the index rises to 4,100, they earn 1,000 USD (100 points × 10 USD), a 25% return on their deposit. If it falls to 3,900, they lose 1,000 USD and receive a margin call.
Margin amplifies results in both directions. These mistakes are common among beginners.
Trading without understanding the multiplier effect of margin.
Ignoring margin calls and being forced to liquidate the position.
Failing to consider rollover costs when rolling over a contract.
Futures contracts address specific needs.
Hedging existing positions against adverse movements.
Speculating with leverage on indices, commodities, or currencies.
Setting future prices for commercial transactions.
A futures contract is a standardized contract traded on an exchange and guaranteed by a clearinghouse. It operates on margin, which amplifies returns. Its regulated structure makes it the most transparent and liquid derivative in the market.