The motivations of futures market participants can be divided into two broad categories: hedging, seeking to reduce the risk associated with owning the commodity or financial instrument underlying a futures contract; and speculating, seeking to profit from price changes in those contracts over time. Both approaches contribute to fair and orderly markets.

1. Hedging / Price Protection
2. Speculation

Hedging / Price Protection

For investors who are exposed to the price fluctuation of a commodity or financial instrument, futures provide a way to manage risk. By taking the opposite position in futures, investors can mitigate the impact of movements against the value of their assets.

Example: An investor has a substantial broad-based stock portfolio. While he has concerns about how the release of upcoming economic news might affect the value of his positions, he is confident in their long-term prospects. However, in order to protect the value of his stocks from a possible decline, the investor sells S&P 500 futures. He is left with the following:

If prices fall after negative projections, the stock portfolio will lose money. The futures position, on the other hand, will profit. On the contrary, if prices rise, any gains in the stock portfolio will be offset by a loss on the futures position. By taking a position in futures contracts, an investor can protect his portfolio from volatile price swings in the market.

Speculation

In the hopes of making short-term profits, speculators assume the risk of price movements that hedges seek to avoid. Speculators strive to profit from fluctuations by purchasing and selling futures contracts.

Since traders can just as easily assume a long or a short position in futures, speculators trade based upon their anticipation of the market's direction. Trading futures allows speculators to outlay less money than would be needed to purchase the underlying asset, usually between five and fifteen percent of its total value. As a result, speculators can control more of the underlying and potentially gain greater profits from price swings.

While offering the possibility of greater profits, this leverage can also work against the speculator by allowing losses greater than the initial margin deposited. If the price of a futures position goes against the speculator, the exchange may require a deposit of additional funds to maintain it. If the price does not rebound, the speculator would lose more than his initial investment.

In attempting to capitalize on price fluctuations, speculators provide market liquidity, which in turn lowers transaction costs and determines a reliable price for the commodity or financial instrument. This liquidity and price stabilization reduces risk for the marketplace overall.

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