How to Understand Dow Futures
The value for the Dow futures contracts is often quoted in the financial news reports, especially before the stock market opens for the trading day. Dow futures trade on the commodity and futures exchanges and track the values on the stock exchanges. Dow futures can be useful to both stock market investors and short-term traders.
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Function
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A futures contract is a tradeable security that calls for the future delivery of a specific commodity or financial instrument. Dow futures are valued at a multiple of the Dow Jones Industrial Average (DJIA). The Dow futures contract is priced to match the value of the DJIA. If the Dow Jones stock index is trading at 11,000, the futures contract will also have a value very near 11,000.
Time Frame
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Electronic trading of the Dow futures is available from 6:00 p.m. Eastern Time on Sunday until 5:30 p.m. Friday afternoon. Dow futures trade around the clock during the week except for the 15 minutes before and after the stock market hours. The stock market hours are Monday through Friday, 9:30 a.m. until 4:00 p.m. The trading of Dow futures while the stock market is closed is why the futures value is used as an indicator before the stock market opens each day.
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Significance
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The almost 24 hour a day trading of the Dow futures means the value of the futures contact can react to global news events while the stock market is closed. The overnight changes in the Dow futures can be an indicator of how the stock market will open for the next trading day. Stock market investors can check on the Dow futures before the market opens through the financial news websites.
Effects
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During the time period when the stock market is open, the value of the Dow futures will track closely with the Dow Jones Industrial Average. During the hours when futures are trading and the stock market is closed, traders will bid on the futures to anticipate the value of the Dow Jones when the market next opens. After- and before-hours trading can be affected by news events or the results of the Asian and European stock markets.
Trading
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Dow futures contracts are valued at a multiple of the Dow Jones stock market index. The standard Dow futures contract is worth 10 times the value of the DJIA and the e-mini Dow futures is valued at five times the DJIA. Futures trading allows a trader to go short or sell contracts if he thinks the Dow will decline or go long or buy contracts if he projects the Dow will increase. The leverage offered by futures trading allows the trader to earn or lose $10 for every one point move in the Dow Jones stock index for one standard contract or $5 per point with an e-mini contract. A trader is required to put up a margin deposit equal to about 10 percent of the contract value for each contract traded.
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