To understand how futures contracts work, let’s look at some key aspects traders need to consider before trading futures, such as:

• Standardization: Futures contracts are standardized agreements, specifying the terms and conditions for the purchase or sale of an underlying asset. These terms include the asset's type, quantity, quality, price, and delivery date
• Market Participants: Two parties are involved in a futures contract: the "long" position (buyer) and the "short" position (seller). Long position holders agree to buy the asset, while short position holders agree to sell it
• Price and Margin: Futures contracts require an initial deposit known as the margin. This margin ensures that both parties can meet their contractual obligations. Daily price fluctuations result in gains or losses, affecting margin balances
• Daily Settlement: Futures contracts are marked to market daily, meaning that at the end of each trading day, profits and losses are realized, and margin accounts are adjusted accordingly
• Delivery or Offset: Most futures contracts are not physically delivered. Traders can offset their positions by taking an opposite position before the delivery date. This is known as offsetting or closing out the contract
• Hedging and Speculation: Futures contracts serve both hedging and speculative purposes. Hedgers use them to protect against price risk, such as producers locking in prices for their products. Speculators aim to profit from price movements without intending to take delivery
• Leverage: Futures contracts allow traders to control a large position with a relatively small initial investment (the margin). This leverage amplifies both potential profits and losses
• Expiration: Each futures contract has an expiration date when the transaction must be settled. Traders must either offset their position or prepare for physical delivery, depending on the contract

Futures trading comes with certain advantages and disadvantages that traders need to consider to decide whether futures trading is the right choice for their financial objectives. 

Pros

• Liquidity: Futures markets are highly liquid, allowing traders to enter and exit positions with ease, often with minimal bid-ask spreads
• Risk Management: Futures contracts enable effective hedging against price fluctuations, helping businesses and investors manage price risk
• Leverage: Futures allow traders to control a larger position with a relatively small margin, potentially amplifying profits
• Diversification: Futures markets cover a wide range of asset classes, offering diversification opportunities for portfolio management

Cons

• Leverage Risk: While leverage can amplify profits, it also magnifies losses, making futures trading highly risky
• Volatility: Futures markets can be extremely volatile, leading to significant price fluctuations and potential losses
• Initial Margin: Futures trading requires an initial margin, tying up capital and limiting flexibility in other investments
• Complexity: Understanding the mechanics and risks of futures contracts can be challenging, especially for novice traders, and may require a steep learning curve

• Futures contracts are financial instruments that obligate two parties to buy or sell an underlying asset at a predetermined price on a specified future date
• Futures are traded on major exchanges, such as the Chicago Mercantile Exchange
• Traders can buy and sell futures contracts using their brokerage accounts, while having the opportunity to increase buying power through leverage
• The futures market is characterized by high volatility, which gives traders many opportunities but also comes with a degree of risk