Futures contracts and forward contracts are both agreements between parties to buy and sell a commodity at some point in the future for a predetermined price.

Futures, however, are sold on an exchange, such as the New York Futures Exchange of New York City, the activity of which can be followed in a financial publication such as "The Wall Street Journal." An individual can buy a futures contract. Forward contracts, on the other hand, are agreements between two financial institutions, usually, or a financial institution and its corporate client. The various futures exchanges have standardized terms of their contracts, specifying the size of the contracts and the delivery arrangements (where and when delivery of the commodity is to be made). Forward contracts, on the other hand, are developed to meet the specific needs of the parties involved.

Futures contracts do not generally terminate in receipt of physical goods. The contracts are closed before delivery of the goods. Forward contracts usually do end in receipt of the goods or financial settlement.

Futures contracts have a range of delivery dates whereas futures contracts have one delivery date, the maturity date.

Futures contracts can be closed at any time before the closing date, whereas forward contracts terminate only on the close date determined at the inception of the contract.

Futures and forward contracts are often used by industries which are dependent on each other to ensure their supplies of needed raw materials. For example, a maker of loaves of bread would contract to buy so much flour at a certain date in the future for a certain price. Both parties thereby lock in a price which satisfies their needs. Of course, the price of wheat fluctuates in the meantime, so it is possible one party can pay more or less than he would like and the other party receives more or less than he would like, but the parties give and receive what was agreed upon at the inception of the agreement.

You can see how a forward contract would be more useful to industries such as these who actually use the commodity being traded. You can also see how individuals hoping to receive a return on their investment would invest in futures where only money changes hands, usually, not the actual commodity.

One must be sure to close the futures contracts before the maturity/delivery dates, or one could find oneself the proud owner of the commodity in question.