Investors who want to speculate on the direction of the stock market, and not just trade individual stocks, can take the plunge into the risky futures market. A future is like a bet between the buyer and seller of a contract. In a Dow futures contract, the bet is decided by the direction of the Dow Jones industrial average, an index of 30 leading stocks that fluctuates along with the general trend of the stock market.
Buying and Selling
You can buy (go long) or sell (short) a futures contract, depending on your opinion of the direction of the Dow index. The contract has a quoted price that matches the value of the index, but its actual value is multiplied by 10. That means that a single point move up or down in the Dow Jones Industrial Average translates into a $10 change in the value of the futures contract. If the Dow index is at 12,450, the futures contract is worth $124,500. Futures traders buy and sell on margin, meaning only a small percentage of the contract value must be deposited into their accounts to trade.
Expiration and Marked to Market
Futures contracts have expiration dates on the third Friday in March, June, September and December. On the date of expiration, the transaction settles with either a profit or loss for the trader. By the rules of the exchange that handles futures contracts, the contract is "marked to market" each day, meaning the rise or fall in the contract value is credited (or debited) to the trader's account at the close of business every day. If the trader's position is losing value, the broker handling the trade may require additional cash to satisfy margin requirements.
E-Minis and Big Dows
For investors with less capital to risk, the exchanges offer an E-mini Dow futures contract, which carries half the value of the standard contract. The E-mini moves $5 for every 1-point move in the Dow, and requires less cash up front to trade. For the large investors and institutional traders, the Big Dow futures trade at a multiple of $25 for every point in the Dow Jones index.
Before the Opening
The Chicago Board of Trade's Globex is the principle exchange for the trading of Dow futures. The Globex operates nearly around the clock on business days, allowing investors to use the early direction of the Dow futures contract to predict the day's performance of the stock market. If the futures are rising in early trading, this usually indicates a positive day. When they are falling, the general sentiment is negative and stock prices, at least in the morning, usually fall.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.