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By Selena Maranjian (TMF Selena)
January 24, 2002

Q. Can you explain what futures are and why they're important?

A. Futures are typically for commodities such as lumber, soybeans, and orange juice. They represent contracts between two parties to buy or sell a certain amount for a specified price at a set future date. (Buy some and fail to pay attention, and you risk having to take delivery of truckloads of pork bellies!) There are even S&P 500 futures, based on the S&P 500. Each day the party who bets wrong is obligated to pony up cash based on the price of the S&P 500.

Futures are bought by some investors to protect themselves against unfavorable price swings, or by speculators betting on where the market is going. They can be very risky. (Of course, they can be quite handy, too -- for example, if you're a cereal manufacturer trying to lock in grain prices.)

Some short-term investors pay a lot of attention to S&P futures, as they can indicate the market's likely moves before trading begins for the day. We don't fret about futures, though. We care much more about where the market is likely to be years from now than where it will be in 45 minutes.

Look up more money-related terms in our handy online glossary. And learn about some other advanced investing topics in Step 12 of our "13 Steps to Investing Foolishly."

This question and answer is adapted from The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending and Investing. For answers to this and 499 other common money questions, check it out -- it's a handy resource.