Futures contracts are a financial instrument used to get leverage on some underlying asset (for example the S&P 500) inexpensively and without tying up much capital. In simple terms it's basically a bet between two parties where each side agrees to pay the other side a certain amount of money depending on how the underlying asset moves. So if you buy a futures contract on the S&P 500, you're entering into a bet with another trader (who sold the contract you bought) that the S&P 500 will go up. Every point the index goes up you make some amount of money (e.g. $25) from him, and every point it goes down you lose that amount of money to him.
They have some nice properties:
- You buy and sell them simply, sort of like stock, and they make gains/losses similar to holding the underlying asset.
- They are inexpensive to buy and sell. You can often buy/sell a contract for $1 or two, which beats the heck out of commissions for stocks and funds.
- They don't tie up as much money, or give you leverage depending on how you want to view it. For example you can essentially control $100,000 of the S&P 500 and need to hold less than $10,000 in your account as collateral for the futures contract (though that would be insane in most circumstances).
- They are simple to do taxes on, you basically only need to deal with a final annual gain/loss and don't detail each buy/sell. They are short-term gains though.
- They aren't included in pattern day trading rules, and other sorts of restrictions aimed at typical investors.
But basically if you don't know why you'd want them, you don't want them. They are very definitely not mustachian.
