“Hey Joe, I’ll buy 10 hot dogs from you, next Friday, for $2 each.”

Baseball fan – entering into a futures contract with joe

Futures investments are, in essence, a contract. When one invests in a “futures” one is entering into a financial contract. In this contract, a buyer and a seller agree that they will each complete their obligation of the contract at a set future date. They agree as to the amount of the underlying assets which will be filled at that future date. They agree today on the price at which the asset will be sold at that future date, in the quantity determined today.

This type of trading is referred to as buying on margin and carries an inherently high-risk/high-reward, can be used for hedging, and future speculation.

The buyer is said to be long on the asset.

The seller is said to be short on the asset.

An Overview Of Futures (investopedia.com)

The item at the center of the futures contract is a derivative of an underlying asset.

• The value of this derivative is based on attributes of the underlying asset.
• The prevailing market price of the underlying asset on this future date is irrelevant.

FUTURES investments	OPTIONS investments
A contract where the buyer and seller are obligated to complete the contract terms.	An agreement where the buyer has the right, but not the obligation, to complete the transaction.

Stock futures, stock-index futures and bond futures – are futures contracts that are standardized, regular, traded in regulated exchanges like the NYSE, are highly transparent and increase the liquidity of the overall market and the planned-liquidity of the contract holders.

Other futures and derivative types can be much more opaque and risky including forwards/swaps, trade over-the-counter, and more.

Futures can only be accessed by approved entities on a futures exchange.

Finance/math

• Rather than exchanging tangible assets, the buyer and seller exchange the “difference in the future price of the asset price at maturity” (Investopedia).
• The buyer will need to apply for, and receive, a margin account.

Who	What	When
Buyer and Seller	Initial margin amount paid by each to the exchange in cash (or collateral). An initial margin is a fraction/percentage of the total exposure and is regulated by the Federal Reserve Board.	At contract start
Buyer (as determined and enforced by seller)	Additionally, margin requirements are in effect such that a percent of equity must be retained on an ongoing basis in the account.	Throughout the contract
Buyer and/or seller	The settlement price (see below) on the day after the contract begins (the day after the contract is signed) is used as the base price. If this base price is below the maintenance margin (as pre-determined within the contract), then the respective party(ies) must post additional funds to cover.	Day after contract-agreement
Buyer	The buyer can close their position (the contract) at any time before the maturity date (end of contract date). However, the buyer then will be responsible for any profit or loss, as of that time.	Throughout the contract
Buyer and/or seller	The difference between the base price (the price at the time of contract-entry) and the settlement price (the price at the time of contract-conclusion – usually an average of the last few prices of trades of the asset) is added or subtracted from the account(s) of the respective party.	At contract conclusion

The Federal Reserve Board issues provisions which govern the cash accounts of the investor and which govern the amount of credit that brokers/dealers can extend to investors for use of purchasing securities.

Regulation-T sets the maximum rate at which credit can be extended at 50%. Thus, an investor can borrow up to 50% of the purchase price of the security.

*** Some brokers may set their initial margin requirement at a higher rate.

• The remaining 50% must be funded with cash (at the time of the sale, presumably?).