Futures trading allows investors to speculate on price fluctuations over time, providing a tradable, standard instrument that can be bought, sold and executed to realize a profit. Like many other derivatives, futures afford in-built leverage to provide the trader with the opportunity to maximize his gains from asset price movement, and as a consequence have grown to become one of the most widely traded instruments on global markets today.
Futures contracts are essentially self-defining – they are standard contracts giving rise to a future trade based on today's price point of a given underlying asset. The essential ingredients for any futures contract are a specific date on which the position will mature, a price point, and a defined asset, e.g. wheat, steel, US government bonds.
Futures can be traded on commodities, stocks and even other instruments, and are traded in liquid markets worldwide by both private investors and large-scale investment houses alike. They work by tying in traders to execute a particular trade (or to reverse their futures position) before a specific date, allowing them to profit on the difference between the quoted future price and the actual future price.
One of the main advantages of trading futures contracts is the role of liquidity. Liquidity refers to the ability to trade an asset for cash. Cash in a bank account, theoretically, could be considered the ultimate liquid asset – any ATM, pretty much anywhere in the world, will convert your bank balance into cash instantly on demand, in a relevant currency so you can spend immediately.
For traders of futures contracts, their instruments are entirely liquid, insofar as they are exchange traded and there is a vast market of traders on both sides. By nature of the function of stock exchanges, institutional investors often 'make' markets, agreeing to execute corresponding positions of traders by default where there is no other willing buyer, allowing the market to flow with virtually absolute liquidity across different tradable instruments.