[Beginner's Guide to a Complex Financial Term, Futures]

Have you ever heard the term 'futures' in the complex world of finance? It often appears in the news or economic articles, but it can be hard to understand exactly what it means or how it relates to our daily lives. Today, let's explore 'futures' in an easy and interesting way. We'll use 'crude oil,' which has a huge impact on the global economy, as an example to make it more relatable.

What are the complex financial terms, Futures? Let's easily break it down with oil prices (crude oil)!

A Transaction that Promises the Future: Futures

In simple terms, a future is a "contract to buy or sell a specific asset at a predetermined price at a specific point in the future." You can think of it like booking a hotel room before a trip or pre-ordering seasonal fruit.

Let's take an example. Crude oil producer Company A is worried that oil prices will fall in the future and wants to sell at the current price. Conversely, oil refiner Company B expects oil prices to rise in the future and wants to secure crude oil at the current price. In this case, Company A and Company B can enter into a futures contract to "trade 100 barrels of crude oil at $80 per barrel six months from now." Six months later, no matter how the actual price of crude oil changes, Company A must hand over the crude oil to Company B for $80 per barrel, and Company B must accept the crude oil from Company A for $80.

As such, futures trading is used to prepare for future uncertainties and reduce the risk of price fluctuations.

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Futures Trading: The Key Terms You Should Know!

To understand futures trading, it's helpful to know a few key terms.

• Underlying Asset: This refers to the asset that is the subject of the futures contract. Various underlying assets exist, such as agricultural products, energy, metals, currencies, and stock indexes. In the crude oil example above, 'crude oil' is the underlying asset.
• Expiration Date: This is the date when the futures contract expires and the actual asset or cash must be exchanged. In the crude oil futures contract, the 'specific date six months from now' would be the expiration date.
• Margin: This is the money that must be deposited in a brokerage account in advance to engage in futures trading. Futures have a 'leverage' effect, which allows you to trade large amounts with a small sum of money, but conversely, the risk of loss is also high, which is why the margin system exists.
• Long Position (Buy): This refers to buying futures in anticipation of a price increase.
• Short Position (Sell): This refers to selling futures in anticipation of a price decrease.

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Futures Trading, a Stepping Stone for Smart Investing

Futures trading is an attractive investment method that allows you to profit based on your predictions of price fluctuations. However, due to high leverage and complexity, you must always be careful when investing. Understanding the basic concepts of futures and becoming familiar with related terms can help you broaden your perspective on the financial market and make smarter investment decisions.

Key Summary:
Futures are a professional tool for predicting future prices and managing risk. Since there is a high leverage effect, sufficient learning and a cautious approach are key to successful investment.

The content of this blog is for reference in making investment judgments only, and investment decisions should be made based on individual judgment and responsibility. In no event shall the information in this blog be used as evidence for legal liability for investment outcomes.