What a futures contract is

The word «contract» is doing all the work in that sentence, and it is worth taking literally. A futures contract is a commitment between two parties: one agrees to deliver something at a future date, the other agrees to receive it, at a price they fix today.

That is the whole idea. Everything else — the exchange, the clearing house, the margin, the codes, the expiry dates — exists to make that commitment tradable by strangers who will never meet and have no reason to trust each other.

Standardised, so that it can be traded

A private agreement between two people can say anything. That flexibility is exactly what makes it impossible to trade: nobody can buy your contract from you without reading it first.

So the exchange writes it instead. Every term is fixed in advance and identical for everyone — what the underlying is, how much of it, how the price is quoted, the smallest permitted price change, when it expires, how it settles. The only thing left open is the price, and that is the only thing anyone negotiates.

This is why one contract is interchangeable with any other of the same kind, and why you can get out of a position without ever finding the person you got in with. That is not a detail: it is the reason the market exists at all.

Nobody trusts you, and that is the point

If two strangers agree on a price for three months from now, one obvious question follows: what happens when one of them cannot pay?

The exchange removes the question by removing the relationship. When your order is filled, the original agreement is immediately split in two and the clearing house steps into the middle: it becomes the buyer to every seller and the seller to every buyer.

The deposit that makes this work is called margin, and it is the single most misread number in the business — it is not a payment and not a down payment. There is a whole article on it later in this stage.

You almost certainly will not receive anything

Two mechanisms keep delivery out of the picture, and it is worth knowing which one is doing the work.

Offsetting

You close a position by taking the opposite one. Bought one contract, sell one contract — the two cancel at the clearing house and you are flat. This is what every intraday trader does, every day, without exception.

Cash settlement

Some contracts cannot be delivered at all. You cannot hand someone an index. Those settle in money against a final published value, so even a position held to expiry produces a number, not a lorry.

Index futures — the ones this whole path is about — are cash settled. Physical delivery is real, and it matters in crude oil and in grains, but it is not your problem here. What is your problem is that the contract still ends.

It expires, and that changes the chart

A share can sit in an account for twenty years. A futures contract cannot: it has a fixed life, usually of three months, and then it stops existing.

Traders who want to stay in the market past that date move to the next contract. That move has a name — the roll — and it has consequences that show up on your screen before anyone explains them to you: the volume moves without warning, the price of the new contract is not the price of the old one, and any tool that needs months of history has months of history on the wrong contract. Article 12 in this stage is about exactly that.

Why any of this is worth your time

Because two of the most common beginner mistakes are really the same mistake, made in different places.

Treating a contract as an object leads to holding it like one — through an expiry, through a margin call, waiting for it to «come back». Treating it as an agreement makes the obligations visible: something is owed, someone is guaranteeing it, and there is a deadline.

None of that tells you what to trade. It tells you what you are holding, which is the part everything else is built on.