Upbeat music plays throughout.
On-screen text: Disclosure: Futures trading involves substantial risk and is not suitable for all investors. Certain requirements must be met to trade futures. Please read the Risk Disclosure Statement for Futures and Options before considering any futures transactions. Futures accounts are not protected by the SIPC.
Narrator: A futures contract is an agreement to buy or sell a specific amount of a commodity or financial instrument at a specific price on a specific date in the future.
On-screen text: Disclosure: For illustrative purposes only.
Narrator: To help you understand why businesses and individuals trade futures, let's examine how futures contracts can be used, the key components that make up a contract, and how much it costs to trade a futures contract.
One use of a futures contract is to allow a business or individual to navigate risk and uncertainty. Prices are always changing, but with a futures contract, people can lock in a fixed price to buy or sell at a future date. Locking in a price can lessen the risk of being negatively impacted by price change.
Let's look at how this might work for businesses using the coffee industry as an example. If the price of coffee beans goes down, it's good news for coffee shops but bad news for coffee farmers. However, if the price of coffee beans goes up, the tables turn. With coffee bean futures, both coffee producers and coffee users are able to lock in prices ahead of time.
Now let's look at how this might work for individuals. Say you're looking to buy a new home in a year, and you're afraid interest rates might rise and increase your mortgage payment.
On screen text: The 30-year Treasury bond futures symbol is /ZB. The 10-year Treasury note futures symbol is /ZN.
Narrator: You could offset a potential interest rate increase by trading interest rate futures such as the 30-year U.S. Treasury bond or 10-year Treasury note, depending on your time horizon.
On-screen text: Disclosure: Futures trading involves substantial risk and is not suitable for all investors, and you can experience a significant loss of funds, or you may lose more than the funds you invested.
Narrator: A second use of futures contracts is to allow traders to speculate on the price movement of commodities, currencies, stock market indexes, and other assets.
For example, consider the fluctuations in the price of a commodity like gold.
A futures trader can potentially profit by correctly guessing the direction that the price of gold will move. But if the futures trader guesses wrong, he can lose his entire investment and more.
Now that you know how a futures contract is used, let's look at five key components of a contract. These are also known as standard contract specifications.
Animation: Images representing different futures products appear on screen. The futures market trades Sunday through Friday. Gold trades Sunday through Friday. Cattle trades Monday through Friday. Oil trades Sunday through Friday.
Narrator: The first thing to look at is trading hours. Futures markets are open virtually 24 hours a day, six days a week; however, each product has its own unique trading hours.
Animation: A chart for gold futures symbol /GC shows a tick size of a tenth of a point. A chart for crude oil futures symbol /CL, shows a tick size of a hundredth of a point.
Narrator: Next, each contract specifies the tick size. Tick size is the minimum price increment a particular contract can fluctuate. Tick sizes and values vary from contract to contract.
A third standard component is contract size. Each commodity or financial instrument has a standardized contract size that doesn't change. For example, one standard-sized contract of crude oil always represents 1,000 barrels. One standard-sized contract of gold futures represents 100 troy ounces.
And one contract of E-mini S&P 500 futures represents $50 times the price of the S&P 500® index.
Another component is contract value, which is also known as notional value. This is the current market value of the commodity represented in a futures contract. To calculate this, multiply the size of the contract by the current price.
On-screen text: Disclosure: For illustrative purposes only. Pricing is as of April 2026, actual prices and data will vary.
Narrator: As you just learned, the E-mini S&P 500 futures contract is $50 times the price of the index. For example, if the index is quoted at 6,850, the notional value of one e-mini contract would be $342,500.
Finally, there's delivery. Contracts are either financially settled or physically settled. Financially settled futures contracts expire directly into cash at expiration. This includes products like the E-mini S&P 500 index futures. Physically settled futures contracts expire directly into the physical commodity. This includes products like crude oil. For example, anyone long a standard contract in crude oil at expiration will receive 1,000 barrels of crude oil. However, don't be worried about 1,000 barrels showing up at your front door. Charles Schwab Futures and Forex LLC does NOT allow clients to take physical delivery—you are required to close the position at least two business days prior to the First Notice Day or Last Trading Day, whichever comes first. If you don't, it will be closed for you. The last trading date of a futures contract will vary so it is important to understand these dates for any product you are considering trading.
On-screen text: Disclosure: For illustrative purposes only. Not a recommendation of any security or strategy.
Narrator: Now, to understand how much it costs to trade a futures contract, let's look at an example.
Suppose a standard crude oil futures contract is trading at $80. At this price, 1,000 barrels of crude oil would cost $80,000.
But a trader doesn't actually have to come up with this amount.
With a futures contract, a trader could take a position in $80,000 worth of crude oil with a smaller deposit.
This deposit is called the initial margin requirement, and it refers to the minimum amount of funds a trader needs to enter into a futures contract.
The initial margin requirement is set by the exchange and subject to change.
On-screen text: Disclosure: For illustrative purposes only. Futures margin, also known as a "performance bond," is the amount of money you are required to deposit in your futures account to establish and maintain a futures position. Futures margin is not a loan. If at any given time the funds in your account drop below the minimum regulatory requirement, or "house" margin requirements, you may be required to immediately deposit additional funds to maintain your position, or your position may be liquidated at a loss. You will be liable for any resulting debits. Charles Schwab Futures and Forex LLC may increase its "house" margin requirements at any time and is not required to provide you with advance notice of such requirement changes or liquidations initiated by Schwab. You are not entitled to an extension of time on any type of margin call.
Narrator: But in our example, we'll say that to purchase one standard-sized crude oil futures contract, the trader had to put up $9,000 for margin to take a position of nearly $80,000 in oil.
As you can see, futures can allow you to leverage a relatively small amount of capital to take a position in a larger underlying asset.
Because of this leverage, small changes in the price of the underlying asset have a much larger impact and can cause greater losses quickly. Keep in mind that although leverage can allow for strong potential returns, it can also result in significant losses, losses that can exceed the capital previously invested. And if losses are substantial, you'll have to add more money to cover all losses.
Now you know how futures contracts can be used, what the contract specifications are, and how much a futures contract costs.
If you're interested in learning more about futures, it's important that you expand your investing education before you make investments. But we're here to help.
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