The above example outlined a classic use of futures in commodities trading, also known as commodities futures trading. Indeed, Futures are derivatives instruments that derive their value from their underlying assets and their main function is to help buyers and sellers of the underlying asset go into purchase agreements that protect against price fluctuations. To date, this remains the most important function of futures trading.

However, apart from being a great hedging tool like it is meant to be, futures trading also opened the door to leveraged speculation of price fluctuations and have created many a lucky stock market millionaire. In fact, with the creation of Single Stock Futures (SSF) in 2002 in the US market by the CBOE, futures trading now extends to stocks of listed companies as the underlying asset, providing participants in the capital market with another avenue of leveraged trading.

Yes, leverage is another reason that makes futures trading so powerful and dangerous.

Futures trading has leverage due to the fact that only a small deposit, known as the initial margin, is needed to control a large amount of underlying asset. Using our corn farmer example above, the buyer of the futures contract on his corns only need pay the farmer a small deposit of maybe only $150 to guarantee the purchase of 5000 bushels of corn at $0.30 per bushel worth $1500 (the "Futures Price") in all. So, instead of paying $1500 to control the price on 5000 bushels of corn at $0.30, the futures buyer paid only $150 to do the same thing. Thats a 10 times leverage on his money.

If the price of corn in this example should suddenly surge to $1 per bushel due to a poor harvest, the buyer of the futures contract would still be able to buy the corn from the farmer for only $0.30 per bushel, and sell those corn in the market for $1.00 per bushel, making a total of $3500 out of a $150 capital commitment. Yes, a 2300% profit! That's the leverage power of futures trading.