ForecastingStocks

A future is a forward that has been standardized and moved onto an exchange. The economic idea is identical — buy or sell later at a price agreed now — but the structure removes the weaknesses of a private forward.

What standardization changes

Standardized terms. Contract size, expiry dates and quality are fixed by the exchange, so contracts are interchangeable and liquid.
A clearing house stands in the middle. It becomes the buyer to every seller and the seller to every buyer, so you never rely on the person on the other side. Counterparty risk is mutualized.
Daily mark-to-market. Gains and losses are settled every day, not just at expiry.

Margin and daily settlement — a worked example

You buy one crude-oil future at US$80.00; the contract is 1,000 barrels, so the notional is US$80,000. You post initial margin of, say, US$5,000 — not the full notional.

Day 0  price 80.00  ->  post 5,000 margin
Day 1  price 81.50  ->  +1.50 x 1,000 = +1,500 credited
Day 2  price 78.00  ->  -3.50 x 1,000 = -3,500 debited

If your margin falls below the maintenance margin, you get a margin call and must top up or be liquidated.

Honest risk

A future is a symmetric obligation. A small adverse move on a large notional, amplified by thin margin, can produce losses far larger than your initial deposit. Futures do not have the capped loss of a bought option — never confuse the two.