What’s the futures market?

The value of your investments and the income you receive from them can go up and down, and you may get back less than you invest. Any examples are for illustration purposes only.

The futures market is a financial marketplace where participants buy and sell standardised futures contracts on regulated futures exchanges. It’s a global marketplace, trading nearly 24 hours a day, Sunday to Friday, and provides access to an array of markets and trading opportunities outside of the traditional stock market. Additionally, futures help provide economic stability by allowing businesses and individuals to hedge against the risk of changing prices, enabling them to operate with greater certainty.

Generally, futures traders fall into two buckets: speculators and hedgers. Speculators tend to take risk while hedgers look to manage it. Each group may consist of individual traders, proprietary trading firms, portfolio managers, hedge funds, market makers and others. Futures brokers, like Robinhood Derivatives, act as intermediaries between traders and futures exchanges, providing access, executing orders and offering essential services while ensuring compliance with regulatory standards.

The futures market is regulated by the Commodity Futures Trading Commission (CFTC). The CFTC oversees futures markets in the US by encouraging their competitiveness and efficiency while protecting market participants against manipulation, abusive trading practices and fraud.

Also known simply as “futures”, a futures contract is an agreement between two parties to buy or sell a particular commodity or asset at a set price on a specific date in the future.

• Futures buyers take on the obligation to buy the asset and typically expect the price to move up.
• Futures sellers have the obligation to sell or deliver the underlying asset and generally expect the price to fall.

Although futures contracts create obligations for both the buyer and seller, most futures traders never intend to make or take delivery of the underlying asset. Instead, they almost always close their contract before it expires.

A futures exchange is a centralised marketplace where futures are bought and sold. Exchanges, like the Chicago Mercantile Exchange (CME), provide the infrastructure and regulatory framework necessary for efficient and transparent trading. Futures brokers, like Robinhood, act as intermediaries between traders and futures exchanges. By facilitating futures trading, futures exchanges play a vital role in global financial markets.

Example

Through its futures exchanges, the CME Group offers a vast array of futures and options contracts across multiple asset classes. As one of the largest and most diversified financial exchanges in the world, the CME Group provides platforms for market participants to hedge risk and speculate on price movements through futures contracts. While the exchange once had a vibrant trading floor, almost all are now closed and the days of traders gathering in trading pits are largely a thing of the past. The bulk of futures trading takes place on CME Group’s Globex electronic trading platform.

A speculator attempts to profit by predicting the change in price of a futures contract. There are two ways a speculator can make profits: buying low and selling high or selling first and then later buying at a lower price to close their position. When a speculator buys or sells a futures contract they’re taking on risk of loss in exchange for the potential of making a profit.

A hedger uses futures to manage their risk and is typically an individual or firm that has a commercial business or financial interests related to the underlying asset. Many hedgers are producers, wholesalers, retailers or manufacturers and their businesses can be affected by changes in commodity prices, exchange rates, interest rates, etc. Meanwhile, investors and portfolio managers can use futures to hedge the risk of changing asset prices in their financial portfolios.

Generally:

• Buy-side hedgers are concerned about rising prices. For example, airline companies sometimes hedge their future fuel costs by buying energy futures.
• Sell-side hedgers are concerned about falling prices. For example, a farmer might sell wheat futures to lock in current prices if they fear crop prices will fall in the future.

Unlike speculators who assume market risk for profit, hedgers use the futures markets to manage and offset risk. Similarly, individual investors and traders can attempt to hedge risk in their accounts. For example, if they own stocks and are worried that prices will fall, they may sell stock index futures to hedge the risk of a market selloff. Of course, market timing, position sizing and costs are just some of the considerations for anyone using futures to hedge risk.

A futures broker facilitates the buying and selling of futures contracts, executes orders and offers services such as holding funds and providing market data for their customers. Futures brokers must be registered with regulatory bodies like the CFTC in the US, ensuring compliance with industry standards and protection for traders. They often charge commissions or fees for their services, which can vary based on different factors.

Established in 1974, the Commodity Futures Trading Commission (CFTC) is an independent US federal agency responsible for regulating the futures and options markets, ensuring their integrity and protecting market participants from fraud, manipulation and abusive practices. The CFTC's primary responsibilities include overseeing trading practices, enforcing compliance with regulatory standards and promoting transparency and financial stability within these markets. By monitoring and regulating the activities of exchanges, clearing houses and market participants, the CFTC aims to foster open, competitive and financially sound futures and options markets, thereby safeguarding the interests of both investors and the broader economy.

Futures markets are global marketplaces trading at high speeds nearly 24 hours a day, Sunday to Friday. They can provide access to a wide array of investment and trading opportunities, like commodities, currencies and metals, that aren’t available in a traditional stock brokerage account.

Important information

When investing, your capital is at risk. The value of your investments, and the income you receive from them, can go down as well as up and you may get back less than you invest. Forecasts aren’t a reliable guide to future results or returns.

Futures are complex products with a high risk of losing money rapidly due to leverage. They’re not suitable for all investors. Before you invest, you should make sure you understand how futures work, what the risks are of trading futures and whether you can afford to lose more than your original investment. Please review the Futures Risk Disclosure Statement prior to engaging in futures trading.

Make sure to do your own research on what investments are right for you before investing or consider seeking expert financial advice. Please note that this article is meant for information and does not constitute any financial advice. This is not an offer, recommendation, inducement or invitation to buy, sell, or hold any securities, or to engage in any investment activity or strategy.