Futures are derivative financial contracts obligating the buyer to purchase an asset or the seller to sell an asset at a predetermined future date and set price. A futures contract allows an investor to speculate on the direction of a security, commodity, or financial instrument. Futures are used to hedge the price movement of the underlying asset to help prevent losses from unfavorable price changes. Pros Investors can use futures contracts to speculate on the direction in the price of an underlying asset. Companies can hedge the price of their raw materials or products they sell to protect from adverse price movements. Futures contracts may only require a deposit of a fraction of the contract amount with a broker. Cons Investors have a risk that they can lose more than the initial margin amount since futures use leverage. Investing in a futures contract might cause a company that hedged to miss out on favorable price movements. Margin can be a double-edged sword, meaning gains are amplified but so too are losses.