Last week, the US crude oil WTI 2005 contract fell to an astonishing -$37.6 per barrel, truly reshaping people's understanding. The central bank's paper crude oil also caught "fire" in the process. While people marveled at the "negative" oil prices, many questions arose, with the foremost being "What is crude oil futures?" "What is the difference between crude oil futures and spot crude oil?" "What is the difference between investing in futures and investing in stocks?"

Today, let's discuss what futures are and how they differ from the stocks we are familiar with.

What are futures?

Futures are a form of transaction that spans time. The buyer and seller agree to exchange a specified amount of physical goods at a designated time, price, and other trading conditions through a contract. Typically, futures are traded on futures exchanges with standardized contracts. Futures can be divided into two major categories based on the underlying asset: commodity futures and financial futures. Commodity futures usually refer to widely traded products such as cotton, soybeans, oil, etc., while financial futures generally involve stocks, bonds, etc.

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In simple terms, what we commonly refer to as buying and selling futures is not a physical object. The -$37.6 per barrel is not the spot price of crude oil but the price of a crude oil futures contract. Although people can take physical delivery of the goods at this price according to the contract, due to the delivery location being in Cushing, Oklahoma, and issues with crude oil storage and transportation, people would not choose to fulfill the contract. Instead, they would close their positions by offsetting their contracts. Therefore, as the specified time in the futures contract approaches, people need to close their positions in a timely manner to avoid default or entering the delivery phase. Thus, the long side needs to sell their contracts. Since everyone is unwilling to enter the delivery phase, there are many sellers, and the price continues to fall. When it falls to zero and still cannot be sold, it has to be sold at a loss. This is why when the US crude oil WTI 05 contract fell to -$40 per barrel, the WTI 06 contract was still at $20 per barrel, as there was still plenty of time before the 06 contract expired, and everyone was not in a hurry to sell their contracts. Therefore, we must recognize that futures are not goods but contracts with time limits. They must be fulfilled upon expiration or closed out in advance by offsetting positions.

Characteristics of futures trading:

- Futures trading is T+0, allowing investors to trade and close positions at any time.

- Futures trading involves standardized contracts for the delivery of a certain quantity of the underlying asset at a specific time and place, as established by the futures exchange.

- Futures trading is bidirectional, meaning that futures can be traded both long and short.

- Futures trading has low costs, with the state only charging transaction fees for futures trading, and no collection of fees such as stamp duty.Futures trading also has a leverage effect. Currently, the minimum margin required for domestic futures trading is only 5%, which entitles one to the rights of future transactions.

In addition to this, it is important to understand that futures are a zero-sum market. The futures market itself does not create profits. The total capital in the futures market remains constant, and the profits of market participants come from the losses of another trader. In the stock market, the total capital can experience negative growth over a period of time, with the total amount of profits being less than the total amount of losses. Therefore, friends who wish to enter the stock and futures markets should still invest according to their own capabilities.

Differences between futures and stocks:

1. Different concepts:

Stocks are ownership certificates issued by joint-stock companies; futures are standardized tradable contracts based on certain popular products and financial assets.

2. Different trading methods:

Stocks follow a T+1 trading system, where stocks purchased on a given day must be held at least until the second trading day; futures follow a T+0 trading system, allowing for buying and selling on the same day.

3. Different trading directions:

Stocks can only be traded in one direction, where investors can only buy stocks and then profit from an increase in their price; futures can be traded in both directions, allowing for both buying and selling, thus providing investment opportunities regardless of whether the price rises or falls.

4. Different sources of returns:The sources of stock returns come from two places: not only can you earn returns through the price difference in stock trading, but you can also gain returns through dividends from listed companies; whereas the returns from futures mainly come from price differences.

5. Different Leverage

Stocks are traded on a full payment basis, meaning you have to pay the full price of the stock. Futures, on the other hand, are traded on a margin basis, and the leverage varies depending on the margin ratio. For example, if the margin ratio is 10%, an investor can use 100,000 to buy a futures contract worth 1,000,000. Both profits and losses are magnified, of course, people can voluntarily pay more margin above the minimum margin ratio set by the exchange to control their leverage.

6. Different Time Limits

Stocks can be held long-term, and if they fall, you can hold on and wait for them to rise slowly; futures, however, have time limitations. Before the contract expires, you need to close the position or take physical delivery after expiration, so you need to be more accurate in judging the price trend.

7. Different Functions

Stocks are a tool for companies or enterprises to raise funds; futures, besides being used for investment, are also a tool for hedging, which can help businesses and institutions to avoid risks.

8. Different Information Reflected in Prices

The price of a stock reflects the specific production and operation conditions of a particular company or enterprise and is susceptible to manipulation; whereas the futures price reflects the overall market situation of the underlying asset, and the price is not easily manipulated by people.