Module 1F: Futures Foundations · Lesson 1 of 13 · Back to Futures Foundations · Course
What you’ll learn
- what a futures contract actually is
- who uses futures, and why
- how a futures trade makes or loses money
- how futures differ from spread bets and CFDs
- why most prop firms use futures
A futures contract in one sentence
A futures contract is a standardised agreement, traded on an exchange, to buy or sell a set amount of something at a set price on a set date in the future.
That “something” can be a stock market index (such as the S&P 500), a commodity (such as oil or gold), an interest rate or a currency. The exchange decides everything except the price: how much one contract covers, how small a price step can be, which months are available and when each contract expires. Buyers and sellers only agree the price.
The biggest futures exchange group is CME Group in the US, which runs the CME, CBOT, NYMEX and COMEX exchanges. Almost all the contracts beginners and prop traders use – the E-mini S&P 500, the Nasdaq-100, crude oil and gold – trade there.
Who uses futures?
- Hedgers – businesses that want to lock in a price. An airline might buy oil futures so a rise in fuel prices doesn’t wreck its budget. A farmer might sell grain futures before harvest.
- Funds and banks – they use index futures to adjust their exposure to the stock market quickly, without buying or selling hundreds of shares.
- Speculators – traders, including individuals, who have no interest in the oil or the shares. They’re trying to profit from price changes. This is where you’d fit.
Speculators aren’t the bad guys. By taking the other side of hedgers’ trades they add liquidity, which helps prices stay tight. But you’re competing with professionals who have better tools and more information than you, which is one reason most retail traders lose money.
How a futures trade makes or loses money
You can buy (go long) if you think the price will rise, or sell (go short) if you think it will fall. Selling first is just as easy as buying – you don’t need to own anything.
Each contract has a fixed value for every price step, called a tick. For example, on the Micro E-mini S&P 500 (code MES), one tick is 0.25 index points and is worth $1.25 per contract (CME Group, checked 18 October 2026). So:
- You buy 1 MES contract at 6,000.00 and sell at 6,010.00. That’s 10 points, or 40 ticks. 40 × $1.25 = $50 profit, before costs.
- If instead the price falls to 5,990.00 and you sell, that’s a $50 loss, plus costs.
Prices are hypothetical, for illustration only.
Your account is updated every day at the exchange’s settlement price (“marked to market”), so profits and losses land in your account daily, not only when you close.
Leverage: why futures are high risk
You don’t pay the full value of a contract. Your broker holds a deposit called margin, which is a small fraction of the contract’s value. One MES contract at 6,000 controls $30,000 worth of the S&P 500 ($5 × 6,000), but the margin is a small part of that.
That’s leverage. It means a small move against you can be a large loss compared with the money in your account. If losses take you below the required margin, you get a margin call – and with a real futures account, a fast market can take you below zero, so you owe the broker money. We cover this in 1F.4 Futures margin explained.
Futures vs spread bets and CFDs
| Futures | Spread bets and CFDs | |
|---|---|---|
| Where it trades | On an exchange – everyone sees the same price and volume | With your provider, who sets the price |
| Size | Fixed contracts (for example $5 per point on MES) | You choose a stake per point or a number of units |
| Expiry | Contracts expire, so you roll to the next one | Usually no expiry (daily funded), with overnight financing |
| Losing more than your deposit | Possible with a real account | FCA-authorised providers must give retail clients negative balance protection |
| UK tax (general) | Usually Capital Gains Tax | Spread bets usually tax-free; CFDs usually CGT |
See futures vs spread betting vs CFDs for the full comparison, and 1F.13 for tax.
Why prop firms use futures
Many prop firms that sell challenges on US markets use futures, especially the micro and mini index contracts. Exchange prices and volume are the same for everyone, the contract sizes make rules simple to set (“maximum 5 contracts”), and the platforms and data feeds are well established. In most cases, though, the account you trade in a challenge is simulated: it uses real prices, but no real futures are bought or sold. See 1F.9 Futures prop firms explained.
Key takeaways
- A futures contract is a standardised, exchange-traded agreement to buy or sell at a set price on a set date.
- Every contract has a fixed value per tick, so profit and loss are simple to calculate.
- Futures are leveraged. With a real futures account, losses can exceed your deposit.
- Most prop firms trading US markets use futures, but challenge accounts are usually simulated.
Quick check
- Who sets the contract size and tick size of a futures contract?
- You buy 1 MES at 6,000.00 and sell at 6,005.00. How many ticks is that, and what is it worth?
- Name one difference between futures and spread bets.
Answers: 1) The exchange. 2) 20 ticks × $1.25 = $25, before costs. 3) For example: futures trade on an exchange, have fixed sizes and expire; spread bets are priced by your provider.
FAQs
Do I have to take delivery of oil or gold?
Index futures are cash-settled, so there’s nothing to deliver. Contracts like crude oil (CL) and gold (GC) are physically delivered, which is why brokers make you close or roll them before expiry. Speculators never intend to take delivery. See 1F.5 Expiry and rollover.
Can I trade futures in the UK?
Yes, through brokers that offer exchange-traded futures. Check that a UK firm is on the FCA Register, and understand what protections you lose with a non-UK broker. See 1F.12.
Are futures better than CFDs?
Neither is “better”. Futures have transparent exchange pricing and fixed sizes; spread bets and CFDs let you trade smaller stakes and come with negative balance protection. Both are high risk.
Disclaimer: This page is general education, not financial, investment or tax advice or a personal recommendation, and it doesn’t take your circumstances into account. Examples are hypothetical, for illustration only, and not an invitation to buy or sell. Learning to trade doesn’t guarantee profits. Past performance is not a reliable guide to future results. Futures, spread bets and CFDs are complex and carry a high risk of losing money quickly because of leverage, and most retail traders lose money. With a real futures account, losses can exceed your deposit. Only trade with money you can afford to lose, and speak to an independent FCA-authorised adviser if you’re unsure. Contract specifications, market hours and margin concepts were checked against CME Group on 18 October 2026 and can change. Read our full risk warning.