Recently, many people have asked me what futures are and how to play futures well. Honestly, this is a topic worth discussing carefully, because many people are both interested in and afraid of futures. I’ve heard of people who used it to get rich, and I’ve also heard of people who lost everything overnight.

Let’s start with history. Futures are actually very old. In the early days, the biggest problem farmers faced was relying on the weather to make a living. When there was a bumper harvest, grains were as cheap as dirt; when the harvest failed, they couldn’t afford to buy. Later, smart people came up with a solution—agreeing in advance that this year, I will guarantee to buy from you a certain quantity of grain at a certain price. This gave farmers security, and it also locked in costs for merchants. This was the earliest prototype of futures.

So what are futures in modern times? Simply put, they are a contract that stipulates that, at a future time, a certain item will be traded at a certain price. That item can be commodities, exchange rates, stock indexes—anything. For example, if I sign a contract with you today saying that three months from now I will deliver to you a S&P 500 futures contract at a price of 100, then no matter whether the S&P 500 rises to 150 or falls to 50, we will both have to transact at 100.

The most attractive part of futures is the leverage effect. You don’t need to pay the full amount—you only need to pay a margin, usually 5% to 10% of the contract value, to control the entire contract. What does that mean? It means that with 1 unit of money, you can control a position worth 10 units and even 20 units. Sounds great, right? But this is also where futures are most dangerous.

How do you play futures? The first step, of course, is opening an account. Go to a reputable futures broker to open an account, and they will provide you with a trading system. The second step is to be clear about whether you want to take a long-term position or a short-term one. If you’re a long-term investor, futures aren’t really suitable as your main tool—they’re mainly used to hedge risk. For example, if you bought Apple stock but worry that the broader market will fall, you can sell short S&P 500 futures to hedge. The third step is to practice with a demo account to verify whether your strategy can truly make money.

In practice, there are basically two ways of thinking. One is going long—if you believe a certain asset will rise, you buy it. For example, if you think oil prices will go up, you buy crude oil futures and then sell later once the price really rises to profit from the price difference. The other is going short—on the contrary, if you believe a certain asset will fall, you sell first, and then buy it back after the price drops. The flexibility of futures is exactly in this: you can go long or go short, unlike stocks, where shorting requires borrowing shares.

But the risks of futures are truly not small. First, leverage is a double-edged sword: it amplifies your gains, but it also amplifies your losses. If you judge the direction wrong, losses can happen extremely quickly. Second, futures only require you to pay a margin, but the corresponding contract may be 20 times the margin—which means that if the price fluctuates too much, you might not only lose all your principal, but also end up owing the broker money. That’s why strict stop-loss and take-profit strategies must be formulated before you trade futures.

Besides futures, there is another product called a contract for difference, or CFD. It combines the advantages of futures and spot trading. Like futures, it uses margin trading and leverage, but it has no expiration date—you can hold it as long as you want. More importantly, the range of tradable assets is richer, the trading specifications are more flexible, and your entry costs are lower. If you feel futures are too complicated or you don’t have enough capital, CFD could be a good option.

In the final analysis, what are futures? They are a powerful tool that can be used to hedge risk or to speculate and make money. The tool itself isn’t inherently good or bad—the key is how you use it. If you don’t have enough knowledge and risk awareness, rushing in will only get you taught a painful lesson by the market. My advice is to first spend time understanding the principles of futures, repeatedly practice with a demo account, develop a clear trading plan, and then try with a small amount of capital. Remember: in the futures market, staying alive matters more than making money.