How to Trade Dow Jones Index Futures

what is the difference between dow and dow futures

If you have little exposure to the futures market, you may, at first, feel perplexed by Dow Futures. Investors seeking exposure to the DJIA can also purchase exchange-traded funds (ETFs) that track the index. Key considerations when choosing a broker are the ease of the trading platform, commission charges, customer service, features such as news and data feeds, and analytical tools such as charts. Gordon Scott has been an active investor and technical analyst or 20+ years. Each week, Zack’s e-newsletter will address topics such as retirement, savings, loans, mortgages, tax and investment strategies, and more.

To hold the position, you must maintain sufficient capital in your account to cover the maintenance margin. Learn more about futures and the unique advantages and risks of futures trading. It is also possible to partially close out of a position if you have more than one contract—for example, selling three of five contracts originally bought, leaving a position of two contracts open. The Dow Futures provide an indication of where the stock market is headed before it opens.

In a futures contract, both parties have an obligation to perform their part of the deal. Futures are a much more complex financial instrument than stocks and bonds and should only be traded by experienced investors. Futures can certainly help an investor realize profits but should be traded with care.

what is the difference between dow and dow futures

Outside the U.S., there are futures available for the DAX Stock Index, which comprises 30 major German companies, and the Swiss Market Index, both of which trade on the Eurex. In Hong Kong, Hang Seng Index futures allow traders to speculate on that market’s major index. Options are derivatives of the futures market, which have a market and exchange of their own. Options are purchased to give the holder the right—but not the obligation—to exercise the terms of the commodities deal.

Investors generally trade commodity futures to hedge or speculate on the price of the underlying commodity. Unlike index futures, which are cash-settled, long-position holders of commodity futures contracts will need to take physical delivery if the position has not been closed out ahead of expiry. Index futures are agreements whose value is derived from a financial index. Essentially, they are agreements to trade the value of an index at a future time, reflecting expectations of the index’s future direction in price. Originally intended for institutional investors, index futures are open to individual investors.

Opening a Futures Trading Account

And the value of the underlying asset—in this case, the Dow—will usually change in the meantime, creating the opportunity for profits or losses. When the contract expires, the buyer of the contract pays the agreed-upon price for the underlying asset, and the seller must deliver it. If you own a futures contract, you may hold it for as long as you’d like up to the expiry. Investors can often roll over the contract to the next month to avoid the costs related to settling the futures contract.

  1. Dow Futures are financial futures which allow an investor to hedge with or speculate on the future value of various components of the Dow Jones Industrial Average market index.
  2. If there’s a market downturn, the stocks within the portfolio would fall in value, but the sold index futures contracts would gain, offsetting the losses from the stocks.
  3. The basis reflects the expected dividends forgone and differences in financing cost between the index futures and its stock components.
  4. The latter allow traders to buy or sell a specified amount of a commodity at an agreed-upon price on an agreed-upon date in the future.
  5. Index futures can be bought and sold and their value changes with the value of the index.

A future can generally be defined as a contract which stipulates the buying or selling of a specified commodity for a certain price at a specific point of time in the future. Index futures trading can be riskier than stock trading, especially when leverage is involved, which can amplify both gains and losses. While index futures offer diversification since they’re based on a broad market index, their volatility and the potential for rapid financial changes heighten the risk. In contrast, stock trading allows investors to avoid inherent leverage, limiting losses to the invested amount.

Types of Index Futures

So if the index trades at 3,400 points, the market value of the contract would be 3,400 x $50 or $170,000. Dow Futures are financial futures which allow an investor to hedge with or speculate on the future value of various components of the Dow Jones Industrial Average market index. The futures instruments are derived from the Dow Jones Industrial Average as E-mini Dow Futures. The position you take on a trade is the purchase price you have agreed upon with the seller. Dow Futures contracts trade on an exchange, meaning that the exchange is who you deal with when you create your position (your price and contract) on the commodity. Dow Futures are commodity trades, with set prices and dates for delivery in the future.

This sets the minimum amount of funds an account must hold to satisfy future claims. For instance, traders can invest in the S&P 500 index by purchasing E-mini S&P 500 futures contracts. Dow Futures have built-in leverage, meaning that traders can use significantly less money to trade futures while receiving exponential returns or losses. This can allow traders to make substantially more money on price fluctuations in the market than they could by simply buying a stock outright. An index tracks and measures the price of a collection of assets, such as a group of stocks.

A Dow Future is a contract based on the widely followed Dow Jones Industrial Average. For example, if the DJIA is trading at 12,000, the price of one Dow Future is $120,000. If the DJIA rises by one point, the value of a Dow Future will increase by $10. If you’ve ever listened to an early morning financial news broadcast, you’ve heard a reference to “futures” and how they affect the stock market before it opens.

However, most days don’t offer market-moving economic reports or random non-financial events that have effect on the market. E-mini Dow futures can provide investors and traders with an efficient way to gain speculative exposure to the U.S. stock market, or they may be used to hedge stock portfolios against overall market risk. E-mini Dow futures may also be spread against other popular stock index futures.

What Is the Difference Between an Index and Index Futures?

Please read the Risk Disclosure Statement for Futures and Options prior to trading futures products. In the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s (S&P) 500 indexes, you’ll find commodities trading. This is where you can trade commodities futures contracts on the index instead of buying into securities. The Dow is often considered synonymous with “the stock market,” though the S&P 500 Index, which is comprised of at least 500 constituents, more broadly represents the U.S. equities market. Still, Dow index futures are a popular tool for getting broad-based exposure to U.S. equity or hedging such positions. Index futures trade on margin, which is a deposit held with the broker before a futures position can be opened.

Mini Dow FAQ

At any other time, the futures contract has a fair value relative to the index known as the basis. The basis reflects the expected dividends forgone and differences in financing cost between the index futures and its stock components. When interest rates are low, the dividend adjustment outweighs the financing cost, so the fair value for index futures is typically lower than the index value.

Putting these together, an index future is a legal contract that obligates traders to buy or sell a contract derived from a stock market index by a specific date at a predetermined price. In low-volatility markets with no significant economic reports, S&P futures may only vary from the previous close by a few points. In these cases, the cash market close will be more influenced by large institutions taking profits or adding to positions during normal trading hours. The Federal Reserve releases minutes of the open-market committee eight times annually during normal cash market hours.

The Dow Jones is the stock market index; the Dow Jones Industrial Average (DJIA), which tracks 30 of the most prominent companies that trade on U.S. stock exchanges. Dow Jones futures are simply futures contracts that can be purchased to hedge or speculate against components in the DJIA. The futures are instruments derived from the index known as E-mini Dow futures.

Index Futures Predict the Opening Direction

Neither Schwab nor the products and services it offers may be registered in any other jurisdiction. Its banking subsidiary, Charles Schwab Bank, SSB (member FDIC and an Equal Housing Lender), provides deposit and lending services and products. Access to Electronic Services may be limited or unavailable during periods of peak demand, market volatility, systems upgrade, maintenance, or for other reasons. At Schwab, you also get access to advanced trading platforms and education, where you can take advantage of market research, real-time E-mini Dow futures quotes, and other specialized tools. The Financial Industry Regulatory Authority requires a minimum of 25% of the total trade value as the minimum account balance, although some brokerages ask for more. As the value of the trade climbs before expiration, the broker can require that more funds be added to the account.

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