For example, if a farmer thinks the price of wheat is going to fall by harvest time, he can sell a futures contract in wheat. That way, if the cash price of wheat does fall by harvest time, costing him money, he will make back the loss by profiting on the futures contract. He 'sold' at a high price and exited the contract by 'buying' at a lower price a few months later, therefore making a profit on the futures trade. Other hedgers of futures contracts include banks, insurance companies and pension fund companies who use futures to hedge against any fluctuations in the cash price of their products at future dates. In other words, they invest in futures in the same way they might invest in stocks and shares - by buying at a low price and selling at a higher price.
Futures are highly leveraged investments.
This is an excellent return compared to buying a physical commodity like gold bars, coins or mining stocks. The margin required to hold a futures contract is not a down payment but a form of security bond . If the market goes against the trader's position, he may lose some, all, or possibly more than the margin he has put up. But if the market goes with the trader's position, he makes a profit and he gets his margin back. For example, say you believe gold in undervalued and you think prices will rise.