By Marco BösingWhat Are Futures?
Futures are standardized contracts traded on regulated exchanges such as the CME Group. Each futures contract specifies exactly which underlying asset (e.g., a stock index, commodity, or currency) will be delivered or cash-settled, at what price, and on what expiration date.
Unlike CFDs or other over-the-counter products, futures provide full market transparency: all orders flow through a central exchange, and every participant sees the same order book. This makes them particularly well suited for order flow analysis and professional trading.
How Does a Futures Contract Work?
When buying a futures contract, the trader enters a binding obligation. Rather than paying the full contract value, the trader posts a margin (security deposit). Daily profit and loss is settled through a process called mark-to-market.
Key characteristics of a futures contract:
- Standardized: Contract size, tick size, and expiration dates are defined by the exchange
- Central clearing: A clearinghouse acts as counterparty, eliminating default risk
- Leverage: Only a fraction of the contract value is required as margin
- Expiration date: Every contract has a fixed expiration, at which point it is settled or rolled
Why Trade Futures?
Futures offer several decisive advantages over other instruments:
- Transparency — Centralized trading with a real order book
- Liquidity — High trading volumes and tight spreads
- Fair cost structure — No hidden spread markups like CFDs
- Tax advantages — Favorable tax treatment in many jurisdictions (e.g., the 60/40 rule in the US)
For a comprehensive introduction to the topic, see our beginner's guide to futures trading.