What Is the Dow Jones Futures Index?

The Dow Jones Index is a market indicator that rises and falls with the values of 30 major stocks that are traded on the New York Stock Exchange. The index is streamed throughout the business day and closes on trading days at 4 p.m. Eastern Standard Time. For those who want to speculate on the future movement of the index, a Dow Jones futures contract is offered. This is a purely speculative investment that does not represent the holding of any tangible property, shares of a company or claims on assets.

Use

• The Dow Jones Industrial Average (DJIA) futures allow investors to speculate on the direction of the stock market or hedge their positions in the Dow Jones stocks. If the stocks fall, a short position in the futures contract will compensate the stockholder with a speculative gain. The futures contract is traded 24 hours a day, and its price is often quoted immediately before the market opens, giving investors a hint about the direction of the stock market that day.

Value and Settlement

• The value of the contract is exactly 10 times the value of the Dow Jones Industrial Average. If the DJIA closes at 11,000, the contract is worth $110,000. Brokers who handle the contract require buyers and sellers to close their transactions and settle in cash each day.

Trading Methods

• The contract is traded through retail brokers as well as online trading systems that specialize in options and futures. Anyone wishing to trade the contract must sign an application to do so and be approved for margin accounts as well as futures trading. These contracts have disclaimers about trading risk and clauses that require mediation in case of any disagreement that arises.

Buying and Selling

• Speculators may buy or sell the contract. Buyers of the DJIA futures contract are guessing that the average will rise. Sellers believe that the average will fall. A buyer of a single contract in a day where the average closes 100 points higher than the previous day would earn $1,000, and the seller would lose the same amount.

Margin Requirements

• The DJIA futures contract allows speculators to gamble with less money but higher risk. Stock buyers must put up at least 50 percent of the money when purchasing their shares. Futures buyers have a much lower margin requirement. As a result, to buy or sell the DJIA futures, they need less money in their accounts. However, this means that any loss is magnified, as a sharp move against the position requires paying out with a higher percentage of the money invested, which is possibly more than 100 percent.