What are Futures Contracts?

A futures contract is like a promise to buy or sell something at a later date for a price you both agree on today.

Imagine you and your friend are planning to trade apples next year. Right now, you don’t know how much apples will cost then. But you can make a deal: you promise to buy 10 apples from your friend in one year for $2 each. That’s like a futures contract, it locks in the price today so neither of you has to worry about future prices.

People use futures contracts when they want to protect themselves from changing prices.

• If you're a farmer, you might sign a futures contract with a baker. You promise to sell your wheat at a certain price next year, so the baker knows how much money they need to save.
• The baker can also use a futures contract, they promise to buy that wheat for a known price, so they don’t get surprised by high prices later.

It’s like agreeing on the price of candy now, so you both know what to expect when you go to the store next week.