What Is a Futures Contract?

beginner7 min read

A binding agreement to trade at a set price on a future date. Symmetric, simple, and serious.

A futures contract is a binding agreement to buy or sell the underlying at a fixed price on a fixed future date. Both sides are obligated — the buyer must buy and the seller must sell when expiry arrives, no matter where the price has gone.

The defining word for futures is obligation. Unlike an option (a right you can walk away from), a futures contract locks both parties in — which makes it beautifully simple but seriously consequential. If you’re long a future and the price collapses, you can’t just abandon the contract; you bear the full loss. This symmetry — both sides equally bound, profit and loss equally open-ended — is what separates futures from options and is the single fact to anchor everything else about them. A future is a promise, not a choice.

Long futures — you’ve agreed to buy; you profit if the price rises, lose if it falls.
Short futures — you’ve agreed to sell; you profit if the price falls, lose if it rises. (You can short futures freely — no borrowing needed, unlike shorting stock.)
Both obligated — neither side can simply walk away; the contract settles at expiry (in India, usually cash-settled for indices).

ExampleYou buy one Nifty future at 22,000. You’re now obligated to “buy” the Nifty at 22,000 at expiry. If the Nifty is 22,500 at expiry, you gain 500 points × lot size; if it’s 21,500, you lose 500 points × lot size. You had no choice in the outcome — the obligation ran both ways.

Key takeawayA futures contract is a binding agreement to buy (long) or sell (short) the underlying at a set price on a set date — both parties obligated, profit and loss symmetric and open-ended. A future is a promise, not a choice (unlike an option).

FAQs

How is a future different from just buying the stock?

A future is leveraged (you post margin, not full value), has an expiry date, lets you short as easily as go long, and obligates you to the contract’s outcome. Buying stock is unleveraged, has no expiry, and you own a real asset. Futures track the price but are contracts with deadlines and margin, not ownership.