If the price of oil keeps going up, should you take the plunge and invest in oil futures? What happens if the price of oil peaks and drops? Is it easy to enter the oil futures market, or would you end up taking a huge loss and sacrificing that early retirement you’ve been dreaming about? Oil futures are an attractive investment, but it’s important to understand the risks before you borrow money in hopes of making a profit later.

What Are Futures, Anyway?
The term “futures” is slang for commodity futures or futures contracts. When you buy a futures contract, you are in essence locking in the price of a commodity so that you can buy that commodity at a future point and time at the same rate as the day you purchased the right to do so. For example, if you bought a future contract for apples today and apples were selling for a dollar apiece today, you would essentially be buying the right to only pay one dollar per apple for a specified amount of apples on the day you exercised your right, which you would do in the future. If the price of apples doubled a year later, you could then exercise your future contract and buy 100 apples at one dollar apiece. Then, you could sell those hundred apples on the free market at market price (two dollars apiece). In an ideal-world scenario, you could make a profit of a dollar per apple.

What Does It Mean to Buy Oil Futures?
Buying oil futures works in the same way as buying apple futures. You’d buy the rights to buy a set amount of oil (negotiated in units of 1,000 barrels of oil per unit) for a set price—the going rate at the moment of purchase of the oil futures. So, if you bought the futures contract for 1,000 barrels of oil at $150 per barrel, and then the price of oil doubled to $300 per barrel in the future, you could exercise your right to buy that 1,000 barrels of oil and resell it on the free market, making a hefty profit.

But What If You Don’t Want to Buy or Sell Oil?
Legislation surrounding oil futures used to specify that those who bought oil futures had to prove they had the capacity to receive the actual product and resell it. No longer. Now anyone with enough cash can buy the right to buy futures, even if they do not wish to receive the product and sell it.

Instead, investors can buy futures and then turn around and sell those futures to a second party who actually wants to buy and sell the commodity. This is called oil futures trading, since no commodity or product exchanges hands, and you won’t wind up with a barrel of oil in your front yard. Only the right to buy at a certain price is being sold in these kinds of transactions. People who buy futures without the intention of ever actually buying and selling the commodity are called “speculators.”

Why Are Oil Futures So Popular?
Oil and gold are the two hottest commodities in the futures market for several reasons:

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