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profit margins (pardon the pun) if you don’t use leverage. And most people won’t trade without leverage even if they can afford it. Do you have $310,000 lying around to buy ten gold contracts at $310/oz. outright? And even if you did and gold moved up $10/oz., your profit would be $10,000, a mere 3% return. In the above margin example with a total investment of $6,200 in gold futures and a profit of $10,000, your return is 161%. Of course the downside is just as magnified with margins. A $3 price drop in the contract’s price would result in a 1% loss if you were an outright buyer. However the same $3 price drop in gold contracts results in a 48% loss for you, almost half of your $6,200 original investment, if you bought your contracts on margin. You’ve been warned! Leverage is a double-edged sword, but just about all futures contracts are traded on margin.

Futures Categories

We have used gold in many of our sample cases because metals provide pretty straightforward examples. If you look at relevant sections of financial publications and papers you will undoubtedly notice that futures are categorized in many different ways.Which ones are correct? Who knows. I like to take a broad view of them, and as such I divide futures into three main categories: Financial, Natural Resources, and Agricultural.