What Exactly Is a Futures Contract?

Jason Damon is an experienced application and business analyst who has worked in Pittsburgh and St. Louis. Currently based in Pittsburgh, Jason Damn works as a trader with a focus on buying and selling futures contracts. These investment vehicles can seem somewhat complicated for individuals who are not full-time investors.

A futures contract is actually a legal agreement between two individuals to sell a particular asset at a specified price and at a predetermined time in the future. The person who buys the futures contract becomes obligated to purchase the asset according to the agreement, and the seller must deliver it. With a futures contract, investors can speculate on the directional movement of the market to buy or sell at a profit.

For example, imagine buying a futures contract at $55 that will expire in 2 months. At the end of those two months, the asset now trades at $70. The person who owns the futures contract purchases the asset at $55, and thus makes $15. However, there is always the chance that the value of the asset could fall and the investor is forced to pay more than what the asset is worth.