You'll see commodities trading within the Dow Jones Industrial Average and the Standard and Poor's (S&P) 500 indexes. It's where you can trade futures contracts for commodities within the index instead of purchasing securities. If you are not exposed to the market for futures, you may initially be confused at first Dow Futures. To make things clearer, here are a few of the basic concepts.
How Dow Futures Work
To comprehend the way Dow Futures work, one fundamental approach is to imagine the grocer and farmer as. The grocer understands that the farmer is likely to have a crop of soybeans that will be harvested shortly and offers the farmer 100 bushels of beans in January at $900. If the farmer is willing that the deal has been concluded, both parties will wait until January. However, regardless of the price for soybeans during January, the price agreed upon is what the retailer will pay. The term "futures contract" refers to a legally binding contract with two people (which may be institutions or individuals) that can swap cash or assets based on the anticipated prices of an index.
Trading
The position you are taking in a transaction is the price you have agreed to by negotiating with the buyer. Dow Futures contracts trade on an exchange. This means you deal with the exchange of the entity you work with when you set up your position (your value and contract) on the commodity. The exchange's purpose is to keep the trading good and eliminate risk. The risk is eliminated by having contracts cleared on the exchange since the exchange guarantees every contract.
When Can You Trade?
Dow Futures begin trading every morning on the Chicago Board of Trade (CBOT) at 7:20 a.m. Central Time (8:20 a.m. Eastern Time). This is one hour and ten mins before the market opens. This lets trading occur, so journalists and analysts can gauge the market's mood (how investors view the market and prices). Market sentiment fluctuates; if an enterprise reports huge profits, which makes the Dow Futures skyrocket, the likelihood is that the market itself will also rise. If an unanticipated weather event closes major shipping routes before the stock market's opening, the Dow Futures could drop since investors start anticipating issues. This could lead to stocks falling when the bell of opening rings.
Buying Futures with Leverage
Dow Futures have built-in leverage, and traders can utilize considerably less money to purchase futures and still earn exponential profits or losses. This allows traders to gain significantly more from price changes than they would by purchasing a stock. Those who believe that the market would rise could buy Dow Futures with a smaller amount of money and then make an enormous profit due to this leverage.
If the market were to fall back to 14,000 instead of the current 8,000 levels, for example, it would mean that any Dow Futures contract would gain the value of $60,000 (6,000 points rise multiplied by 10 leverage factor equals $60,000). It's important to note that the reverse could occur. If the market fell and it's possible that the Dow Futures trader could lose massive amounts of money.
Dow Jones Industrial Average
Sometimes called "the Dow," the DJIA is among the most closely watched stock indexes globally. It includes corporations like Apple, Boeing, Microsoft, and Coca-Cola. The DJIA began with 12 companies, mostly from the industrial sector. Then, it grew to include more than 30 companies. Initially, the companies were involved in railways, cotton, gas, tobacco, sugar, and oil. The performance of industrial companies is often viewed as a link with the entire economy, which makes the DJIA an important indicator of overall economic health. Even though the state of the economy is now linked to many different sectors, the DJIA remains an essential measure of the U.S. economy's well-being.
Dow Jones & Company owned the DJIA and several other indexes covering different areas that make up the market. They had the longest-running index known as the Dow Jones Transportation Average, which tracks 20 transportation firms like transportation companies or delivery services. Another important index includes the Dow Jones Utility Average, which is a gauge of the performance of 15 U.S. utility stocks. In 2012, S&P Dow Jones Indices LLC purchased Dow Jones Indexes. A is a joint venture formed by the controlling shareholder S&P Global and the CME Group.
