Trader's Glossary


Futures contracts allow buyers and sellers to agree upon a price for an asset to be exchanged at a later date. A buyer in a futures contract goes ‘long’, hoping that the asset will rise in value. The seller goes ‘short’, hoping that the asset will fall in value. Futures are quite similar to forwards, in that both contracts secure a price for a transaction that is deferred, however futures contracts differ from forwards in several key ways. Firstly, futures contracts are traded over an exchange, this means they have to be standardised and so are more rigid than forwards. Secondly, futures are marked-to-market daily, which means that the differences in value from the time the contract is entered into are settled on a daily basis between the buyer and the seller, unlike forwards that are settled at the very end of the contract. Finally, futures are more often used by speculators who have no intention of taking physical possession of the asset being traded; this means that futures contracts are normally closed-out before they reach maturity. Forwards, in contrast, are used by sellers such as farmers, who want to hedge against price instability and so the commodity being traded is most often exchanged at the contract’s maturity.