Futures

A future is a trade that will take be executed at a future time, based on a predetermined underlying security (e.g. shares), with a fixed price (strike).

Between the time you buy or sell the future and the expiry date market conditions often change, and this has an impact on how market participants assess the risk of the future and put a value on the future.

Example: A farmer can lock in the price he/she gets for wheat he/she expects to harvest and wants to sell. He/she can do so by buying a future that guarantees the price, the volume, and the date when this deal will be executed. In essence the farmer trades planning security for a potentially higher price.

In this example the future does not cover a financial instrument but a commodity. Other futures may cover electricity, gold, oil, petrol, pork bellies, or frozen orange juice, to name a few.

As opposed to futures, options represent a potential future buy/sell. With futures the buy/sell will take place no matter what.

Recommendation

Futures represent a high risk. In some jurisdictions futures are not available to the average investor at all. In some jurisdictions you have to meet certain criteria to obtain a certification. All of these are intended to protect the investor from loosing a huge amount of money up to multiples of you total net assets. Potential losses (as well as gains) should be viewed as more or less limitless. Therefore if you don't know precisely what you are doing, you are gambling with bankruptcy.

Futures are typically less suited for a long-term investor. Seldom you will find futures that have an expiry date of five or more years out. As such futures are not backed by tangible assets. Shares are (although their value is debatable).