Financial Dictionary -> Investing -> Futures

In business, Futures is the generalized term that refers to the various kinds of Futures contract that are traded on the futures exchange. The process works by either agreeing to buy or sell various financial instruments (such as bonds, currencies or stock) at a certain time in the future, which due to various economic factors could prove valuable or invaluable to both parties and it is this risk that spurs futures traders to enter the market. Some futures contracts might call for the physical delivery of the asset, while others are settled in the cash amount. The term futures comes from the act of agreeing with a contract to buy and sell in the future.

The profit margins in futures contracts come from fluctuations in the market. For example you may enter in to a futures contract to buy a certain amount of oil in five years, but in five years the value of the oil may have dropped significantly meaning the seller would make a profit. If however the value skyrocketed then you would make the profits. The price of the sale is agreed beforehand in the contract so it can be seen as a risky investment and sale.

Despite this risk the seller will go to great lengths to predict where the market is heading and along with the buyer will try to come up with a 'futures price' that will best suit the situation. This doesn't mean that both sides won't be bartering for the best deal and there are other outside factors that can affect the agreed price.

An options contract, which is similar to a futures contract, gives the holder the right to exercise the contract's terms, whereas in a futures contract both parties agree and the ultimate transaction must take place. In other words options give the buyer an option to choose.