Futures Trading: What It Is And How It Works

Futures trading is an investing activity typically reserved for speculators or companies that are looking to hedge against the future price of their products. However, any individual investor with a margin account can participate in futures trading.

When you buy a futures contract, you are essentially locking in the price of the underlying asset or commodity. As a seller of a futures contract, that means you have a guaranteed selling price for your goods. And, as the buyer, you have protection against price increases.

Those who trade futures can also take big advantage of small price movements in the underlying commodity or financial product by using leverage. But, like other types of investing that involve speculation and leverage, individual investors should approach futures trading with extreme caution. Here's what you need to know.