What is a futures contract?

Welcome to lesson 1. By the end of this page you will be able to explain a futures contract in 1 sentence, which is more than many people who trade them can do.

The 1-sentence version

A futures contract is an agreement to buy or sell something at a set price on a set date in the future.

That something can be a barrel of oil, an ounce of gold or a stock index like the Nasdaq 100. The contract is standardized, so every buyer and seller trades the exact same thing: the same amount, the same quality and the same expiry date. That is why millions of contracts can change hands every day on an exchange.

Where futures came from

Futures started with farmers and food companies. A wheat farmer wants to lock in a price before harvest. A bakery wants to lock in the cost of flour. A futures contract lets both sides agree on a price today for wheat that will change hands later. Both sides sleep better because the price is settled.

Today most futures volume comes from traders who never want to see a bushel of wheat. They want to profit from price changes, and futures give them a fast, liquid way to do it.

Day traders trade the movement

Here is the part that confuses beginners. If you buy a Nasdaq 100 futures contract, nobody delivers stocks to your door. Index futures settle in cash, and day traders close their trades long before the contract expires anyway.

A day trader buys a contract at one price and sells it a few minutes or hours later at another price. The difference is the profit or loss. The contract is a vehicle for trading the price movement of the market it tracks.

Going short is as easy as going long

With stocks, betting on a fall takes extra steps. With futures, selling first is just as simple as buying first.

• Long: you buy first and profit if price rises.
• Short: you sell first and profit if price falls.

Both directions use the same button on your platform. This is one reason futures are popular with day traders: you can trade the market in whichever direction it is moving.

Leverage cuts both ways

Futures are leveraged. You control a large amount of the underlying market with a small amount of money in your account. That means a small move in price becomes a big move in dollars.

Leverage is why futures can grow an account quickly, and it is also why they can shrink one quickly. A move that would barely register on a stock position can be hundreds of dollars on a futures position. Every lesson in Module 3 exists because of this one fact.

Why traders like futures

• Nearly 24-hour markets. Futures trade from Sunday evening to Friday afternoon, with a short daily break. Lesson 4 covers the hours.
• Deep liquidity. Popular contracts like NQ and ES trade huge volume, so orders fill fast.
• Simple short selling. No borrowing and no extra rules to go short.
• Clear pricing. Every contract has a fixed dollar value per price move, so you always know what a move is worth.

Your 1 sentence

Try it now, out loud or on paper: "A futures contract is an agreement to buy or sell something at a set price on a set date, and day traders use it to trade price movement with leverage." If you can say that, you are ready for lesson 2, where letters and numbers like NQZ26 start to make sense.