The investing essentials / 07
Futures & commodities,
made understandable.
Learn what a futures contract represents, how margin changes the risk, and why expiration matters.
01 / Understand contracts
The asset and the contract are different.
A commodity is a raw material, such as oil, wheat, or copper. A futures contract is a standardized agreement with a set quantity, expiration, and settlement method. Futures also cover financial markets, including stock indexes and interest rates.
Buying a futures contract creates a long position that benefits when its price rises. Selling creates a short position that benefits when its price falls. Both can lose money, and neither is simply a purchase of the physical commodity today.
One contract can represent many units.
Fictional contract · simplified arithmetic
You buy one contract covering 100 units at $100 per unit. Its initial notional value—the exposure represented—is $10,000. See the gain or loss if you close at a different price:
No price change means no trading gain or loss, before costs.
One contract, 100 units
Each square is one unit of the contract.
$0 × 100 units
Every unit moves together, so a small price change is multiplied 100 times.
Excludes fees and taxes. Shows total price profit or loss; actual cash flows are settled along the way. Contract sizes and quotation conventions vary. These are not market quotes.
What kinds of futures exist?
Commodity futures: energy, agricultural products, and metals.
Financial futures: stock indexes, currencies, and interest rates.
Each contract has its own specifications. Similar names or a “micro” label do not tell you the full exposure.
Why do businesses use futures?
Hedgers use futures to reduce exposure to price changes. For example, a producer may sell futures to offset a decline in the cash price of its product. The hedge may be imperfect because quantities, timing, and prices can differ. Speculators instead take price risk in pursuit of a trading gain.
Which terms should I learn first?
Contract size: the quantity or multiplier represented.
Tick: the smallest permitted price increment, with a contract-specific dollar value.
Expiration: when the contract reaches its final stage.
Open interest: outstanding contracts.
Basis: commonly the cash price minus the futures price.
Learn more: SEC’s introduction to commodities ↗
02 / Margin and risk
Your deposit is not your maximum loss.
Futures margin is collateral supporting the contract, not a down payment on the asset. Gains and losses follow the full contract exposure. Losses can exceed the money you deposit.
Put the example in perspective.
Suppose our fictional $10,000 contract required $1,000 of margin. The $200 loss from a 2% price drop equals 20% of that margin.
Changing the deposit does not change the contract’s $200 loss.
Same $200, two very different shares
The $200 barely shows against $10,000 of exposure, but it is 20% of the deposit.
Hypothetical margin, not a current requirement or recommended account size. Exchange and broker requirements vary and can change.
Cash moves before expiration.
Open positions are marked to market: gains and losses are credited or debited through daily settlement. You may need additional funds while a trade is still open.
Margin shortfalls can force an exit.
If your account falls below required levels, your broker may require funds or liquidate positions. Do not assume you will have time to deposit money before closure.
Exit orders have limits.
Stops do not guarantee an execution price or cap your loss. Gaps, price limits, and thin trading can make closing a position difficult.
Initial margin or maintenance margin?
Initial margin is required to open a position. Maintenance margin is the level used to determine whether more collateral is needed to maintain it. Broker requirements can exceed exchange minimums. A low advertised intraday margin does not mean a low-risk trade.
Are spreads or smaller contracts automatically safer?
No. A spread combines long and short positions, but their prices can move apart unexpectedly. Smaller contracts reduce exposure per contract relative to their larger equivalents; taking more contracts can undo that reduction. Always calculate total exposure and dollar value per tick.
Read more: CME’s margin explanation ↗ · NFA investor best practices ↗
03 / Before you trade
Read the contract before the chart.
“How much exposure is this, when must I act, and what happens if I cannot exit?”
Understanding commodities does not require trading futures. If you are considering a contract, work through these checks first.
Confirm size and trading costs.
Read the exchange’s specifications: contract multiplier, quotation units, tick value, trading hours, and price limits. Include commissions, exchange fees, and any platform or data charges.
Know expiration and settlement.
Some contracts settle in cash; others can require physical delivery. Check last trading day, any first notice date, and your broker’s earlier closeout deadlines. Do not rely on the expiration date alone.
Verify the broker and account rules.
Check CFTC registration, NFA membership, and disciplinary history through NFA BASIC. Read margin and liquidation policies. A simulation can teach order entry, but does not reproduce every live-market cost or execution risk.
What does it mean to roll a contract?
Rolling means closing one contract and opening another with a later expiration. It does not erase a loss. Different months can trade at different prices, and the new trade adds costs and exposure.
Is a commodity fund the same as owning a commodity?
No. A product may hold physical assets, futures, or shares of commodity-related businesses. Futures-based returns can differ from spot-price changes because of contract pricing, rolling, collateral returns, and fees. Read the prospectus to understand the exposure.
What drives commodity prices?
Supply, demand, inventories, weather, production disruptions, and economic conditions can matter. Financial futures respond to their own underlying markets. Charts and reports help organize information, but neither guarantees a price forecast.