Futures are derivative contracts that derive value from a financial asset, such as a traditional stock, bond, or stock index, and thus can be used to gain exposure to various financial instruments, including stocks, indexes, currencies, and commodities.

Futures are a common vehicle for hedging and managing risk; If someone is already exposed to or earns profits through speculation, it is primarily due to their desire to hedge risks.

Future contracts, because of the way they are structured and traded, have many inherent advantages over trading stocks.

Advantages of Trading Futures

1. Futures Are Highly Leveraged Investments
   To trade futures, an investor has to put in a margin—a fraction of the total amount (typically 10% of the contract value). The margin is essentially collateral that the investor has to keep with their broker or exchange in case the market moves opposite to the position they have taken and they incur losses. This may be more than the margin amount, in which case the investor has to pay more to bring the margin to a maintenance level.
2. Future Markets Are Very Liquid
   Future contracts are traded in huge numbers every day and hence futures are very liquid. The constant presence of buyers and sellers in future markets ensures market orders can be placed quickly. Also, this entails that the prices do not fluctuate drastically, especially for contracts that are near maturity. Thus, a large position may also be cleared out quite easily without any adverse impact on price.
3. Commissions and Execution Costs Are Low
   Commissions on future trades are very low and are charged when the position is closed. The total brokerage or commission is usually as low as 0.5% of the contract value. However, it depends on the level of service provided by the broker. An online trading commission may be as low as $5 per side, whereas full-service brokers may charge $50 per trade.
4. Speculators Can Make Fast Money
   An investor with good judgment can make quick money in futures because essentially they are trading with 10 times as much exposure as with normal stocks. Also, prices in the future markets tend to move faster than in the cash or spot markets.
5. Futures Are Great for Diversification or Hedging
   Futures are very important vehicles for hedging or managing different kinds of risk. Companies engaged in foreign trade use futures to manage foreign exchange risk, interest rate risk by locking in an interest rate in anticipation of a drop in rates if they have a sizable investment to make, and price risk to lock in prices of commodities such as oil, crops, and metals that serve as inputs. Futures and derivatives help increase the efficiency of the underlying market because they lower unforeseen costs of purchasing an asset outright. For example, it is much cheaper and more efficient to go long in S&P 500 futures than to replicate the index by purchasing every stock.