The futures market lets opportunistic investors use small amounts of their own money to control large amounts of products like gold, currencies, and agricultural commodities.
A futures contract is a legally binding agreement to deliver, if you are selling, or take delivery, if you are buying, of a specific commodity, index, bond, or currency at a certain date or price. A futures contract can be for a standard amount of wheat, oil, or even the currency of a country. The amount and date of delivery are written into the contract, but almost never is delivery made because contracts are bought and sold to speculate or protect against risk.
Futures are used by both people who actually use the commodity and people who want to make money. For instance, a farmer might plant some corn in May but not know how much corn will sell for in November. He can sell a futures contract for November and "lock in" the price at which it will sell in the future. On the other hand, investors can buy a futures contract if they think the price of a security will go up, or they can sell a futures contract if they think the price of a security will go down.
People often put futures in the same group as options. Even though they are both derivatives in the sense that their value comes from a base security, there is one very big difference between them. Options give you the right to buy or sell the underlying security, but not the obligation to do so. A futures contract, on the other hand, makes you legally obligated to buy or sell that same commodity. So, if you buy an option, the most you can lose is the price you paid for it, but if you trade futures, you could lose your whole investment and more to meet that obligation.
The word "margin" is used differently in the futures market than in the stock market. Even though currency contracts are often worth more than $100,000 each, an investor does not have to buy or sell a full contract. Instead, a margin deposit is kept on the contract. This is a "good faith" amount of money to make sure you meet all of your futures contract obligations. Minimum margin requirements vary from broker to broker, but they are usually a small fraction of the total value of the contract and have nothing to do with the price of the contract itself.
Futures trades must be done through futures brokers, who offer both full-service and discount services. They may be connected to the stock brokerage you already use. But futures contracts are not something that popular discount stockbrokers deal with.
