Investing Basics: Understanding the Fundamentals of Futures

You’ve probably seen headlines like “futures selling drove the market down” or “leveraged trader gets liquidated.” But if someone asked you “what exactly is a futures contract?”, it’s not an easy question to answer on the spot. In this article, we’ll walk through what futures are and how they’re actually traded — starting with terms like expiration, margin, and leverage, and building up to why that scary word “liquidation” comes up in the first place.

What Is a Futures Contract?

1The comparison point: spot trading happens right now

To understand futures, it helps to start with the spot trading we’re already familiar with. If you buy Samsung Electronics stock today, the shares land in your account today, and you pay for them today. It works exactly like buying something at a convenience store — you pay, and you get the item immediately. The “stock price” we check every day is this spot price.

2Futures are a promise to trade at a set price in the future

3So what actually trades as spot, and what trades as futures?

Individual stocks like Samsung Electronics are usually traded as spot. When you tap the “buy” button on a brokerage app, that’s a spot transaction. The three categories below, on the other hand, are the ones where futures trading is especially active.

For reference, individual stocks like Samsung Electronics can technically be traded as futures too — the Korea Exchange offers “single-stock futures.” But trading volume there is far lower than for index futures, so in practice, when people say “futures,” they usually mean the index, commodity, and currency futures listed in the table above.

Expiration and Contract Units

1Expiration date

The expiration date is the future date by which the contract must be settled. KOSPI200 futures expire on the second Thursday of March, June, September, and December. Here’s an interesting detail: at any given moment, contracts with several different expiration dates are trading simultaneously. The contract with the nearest expiration is called the near-month contract, and the next one out is the far-month contract. For example, if it’s currently July, the September contract (near-month) and the December contract (far-month) are both trading at the same time. Most of the trading volume is concentrated in the near-month contract.

2Contract unit (multiplier)

Futures aren’t traded “per share” the way individual stocks are — they’re traded in fixed contract units. For KOSPI200 futures, each index point is multiplied by ₩250,000.

Trading just one contract already means controlling an asset worth over ₩280 million. Understanding the multiplier is what lets you grasp exactly how large a trade you’re actually making.

The way “how much is one contract worth” is calculated is completely different depending on the asset type. Index futures use “index level × multiplier,” commodity futures use “price × physical quantity,” and currency futures use “exchange rate × notional amount.” That’s why, whenever you encounter a new futures product, it’s worth making a habit of checking its contract unit first.

Margin and Leverage

1Margin (initial margin and maintenance margin)

With futures, you don’t pay the full contract value up front — you can trade by depositing just a portion of it as collateral. This money is called margin, and there are two types.

Trouble starts when your account balance falls below the maintenance margin — we’ll cover exactly what happens then in Section 8.

2Leverage

Leverage refers to the effect of controlling a much larger contract value using only a small amount of margin.

In other words, it’s the same effect as controlling an asset worth 10 times your own money — so even a small price move produces a much larger gain or loss relative to your margin.

3Long positions and short positions

With spot stocks, “short selling” requires borrowing shares first and involves a fairly cumbersome process. A short position in futures is different — there’s no such procedure. It’s simply executed with a single sell order.

How Are Futures Actually Traded?

1Opening and closing a position

Futures trading starts by placing an order to open a long or short position. At any point, you can place an opposite order (a sell if you’re long, a buy if you’re short) to close the position and lock in your gain or loss. You’re not required to hold a position all the way to expiration — in fact, most individual investors close their positions well before that point.

2If you want to trade in Korea

For individuals trading futures in Korea, the requirements below must be met. Because it’s a high-leverage, high-risk product, these rules exist to confirm at least a baseline level of understanding.

3Getting a feel for it with a worked example

Let’s continue with the KOSPI200 futures example from before (index level 1,120, multiplier ₩250,000, margin ₩28,000,000).

Why Do Futures Prices Differ from Spot Prices?

1The concept of basis

Oddly enough, even though it’s the same underlying asset, the spot price and the futures price are always slightly different. This gap is called the basis.

In this example, the basis is 1,124 − 1,120 = +4 points.

2Why does this gap exist?

The futures price bakes in “the cost of holding the asset until expiration.” If you imagine buying the stock now and holding it until expiration, you’d pay interest costs over that period, but you’d also collect dividends. This net cost of carry (interest cost minus dividends, and similar factors) is what gets added onto the futures price.

We’ll walk through exactly how this formula plays out as contango and backwardation, with real numbers, in the next section.

Contango (When Futures Prices Are Higher)

Contango and backwardation are just names for which direction the basis (futures price − spot price) is tilted. Let’s start with contango, which is the more common state.

1The normal state, where the futures price is higher

Under normal conditions, interest cost outweighs expected dividend yield. So in the formula “futures price ≈ spot price + interest cost − expected dividend yield,” the interest cost term dominates, and the futures price ends up higher than the spot price. This everyday state — where interest cost exceeds dividend yield — is called contango.

2Working through the numbers

Say the annual interest rate is 3% and the KOSPI200’s expected dividend yield is 1.5% — a gap of 1.5% per year. With 3 months (one quarter of a year) left until expiration, we divide that gap by 4, giving 1,120 × 1.5% ÷ 4 ≈ 4.2 points added to the futures price.

🇰🇷 Korea: KOSPI200 futures are frequently in contango, largely driven by the gap between dividend yield and interest rates.

Backwardation (When Futures Prices Are Lower)

Backwardation is the opposite of contango — an exceptional state where the futures price ends up lower than the spot price. Let’s look at why this reversal happens, first for stocks and indices, then for commodities.

1For stocks and indices

Things flip when dividend season approaches — periods like April or December, when many companies pay out dividends. Say the expected dividend yield suddenly jumps to 4.5%. The gap with the 3% interest rate becomes −1.5% annually, and over a 3-month horizon that works out to 1,120 × (−1.5%) ÷ 4 ≈ −4.2 points. In other words, the stronger the expectation of “a solid dividend payout coming soon,” the more the futures price drops below the spot price to reflect it.

2For commodities

Commodities like crude oil or gold don’t pay dividends, but they have something else: demand for “having the physical good right now” — what’s known as a convenience yield. For instance, if a war or supply disruption creates a sudden oil shortage, refiners will want oil “in hand today” far more than oil “delivered in the future.” As a result, spot oil trades at a premium, and the spot price ends up higher than the futures price — that’s backwardation. WTI crude oil futures are a classic example, frequently slipping into backwardation due to storage constraints or geopolitical issues.

3They meet in the end, at expiration

This connects directly back to the rollover concept from Section 2 (switching into the next expiration’s contract). Rolling over during contango means switching into a more expensive far-month contract each time, which quietly erodes value (often called “roll cost” or “contango loss”). Rolling over during backwardation, on the other hand, actually works in your favor — you switch into a cheaper far-month contract.

🇺🇸 United States: Crude oil futures (WTI) are a well-known example of a product that frequently slips into backwardation, due to storage costs and supply issues.

How Does a Margin Call Happen?

1When you fall below the maintenance margin

This is where the maintenance margin from Section 3 becomes critical. Problems begin the moment your losses grow large enough to push your account balance below the maintenance margin level. Let’s continue the earlier example with concrete numbers.

The account balance of ₩14,000,000 is now below the maintenance margin level of ₩22,400,000. This is exactly the moment a margin call is triggered.

2Margin calls: a request for more funds

When margin runs short like this, your broker will ask you to “top up the shortfall” — this is called a margin call. Brokers typically require you to bring the balance back up not just to the maintenance margin, but all the way to the original initial margin level. In the example above, you’d need to deposit an additional ₩14,000,000 to bring the balance from ₩14,000,000 back up to ₩28,000,000.

What Happens When You Get Liquidated?

1Liquidation (forced offsetting trade)

If you can’t top up your margin by the deadline, your broker will forcibly close out your position. This is exactly what’s meant when you see news or forum posts about someone “getting liquidated trading futures.” Whether you’re long or short, any position where you’ve taken on an obligation and posted margin is equally exposed to this risk.

Because this happens urgently at market price, if the market is crashing (or spiking) at that moment, you could end up liquidated at a worse price than expected — which can make the loss even larger.

2What if your account is still negative after liquidation?

This is the part that worries people most. Sometimes losses grow so large that liquidation still doesn’t fully cover them — your margin alone isn’t enough. For example, if the index crashes 15% in a single day and your loss balloons to ₩42,000,000, you’d lose the entire ₩28,000,000 initial margin and still be short ₩14,000,000.

Why Do We Even Need Futures?

So far, we’ve covered what futures are, how they’re traded, and the risks involved. So why would anyone bother trading something this complicated and potentially risky? There are broadly two reasons. One is hedging — trying to eliminate price-movement risk ahead of time. The other is speculation — trying to profit from price movement itself. Let’s look at each.

Risks Every Beginner Should Know

Key Terms and Checklist Recap

Wrapping Up

Futures come up constantly in the news, but at their core they start from a simple idea: a promise about the future. It’s the machinery built on top of that idea — margin, leverage, margin calls, liquidation — that can make things feel complicated for beginners.

To recap the essentials: futures let you control a large contract with a relatively small margin, which magnifies both gains and losses; if you fail to top up your margin within the deadline, your position can be forcibly liquidated; and if the resulting loss exceeds your margin, that excess becomes a real debt you have to repay.

If you keep in mind that “you can lose more than you put in,” you’ll be much better equipped to approach futures safely. In the next installment, we’ll move on to the basics of options, a product that’s often discussed alongside futures.