Dow Jones Futures

The Dow Jones Industrial Average, or Dow Jones, is probably the most well-known stock market index in the world. Composed of 30 major American companies, including names like AT&T, Coca-Cola, ExxonMobil, Hewlett-Packard, Microsoft, and Wal-Mart, the Dow Jones attempts to gauge the relative strength of the U.S. economy and provide a metric by which investors can evaluate current economic conditions not just in the U.S. but abroad.

Some investors aren’t aware that you can actually trade futures based on the Dow Jones. The big difference between these futures and others, like those based on coffee, oil, or natural gas, is that there is nothing to take delivery of. In that sense, Dow Jones futures are purely financial in nature.

Here, I’ll give you a rundown of Dow Jones futures, including pertinent information about their contracts, historical price activity, and other factors you should understand.

Historical Prices and Price Factors

Dow Jones futures prices attempt to indicate where the Dow Jones will be valued at some point in the future. As such, the underlying ‘commodity’ is the Dow Jones Industrial Average itself. So, whenever the Dow Jones rises or falls, futures will reflect those changes.

Dow Jones futures, thanks to market psychology, can even influence the Dow Jones. How? Well, even though the index may be comprised of 30 different companies, investors can see a spike in Dow Jones futures (created by nothing more than speculation and expectations) and assume that the market will rise – and they’ll trade accordingly. It happens more often than you might think.

Apart from major systemic factors that impacts the economy as a whole, there are very many individual factors that drive the price of Dow Jones futures. Market psychology plays a role, as does any major issue that impacts several index member companies at the same time. For example, when the financial near-meltdown happened in 2008, the Dow was hit heavily by losses in three components in the financial industry: Bank of America, Citigroup, and JPMorgan Chase. Citigroup is no longer in the index and was replaced in 2009 by an insurance company.

Historically, the Dow Jones is many times more valuable than it was at its inception. The Dow Jones futures price chart below shows you the upward trend in the index:

The massive rise in the mid-1980’s began as America’s economy began to take off; the trend was only slowed on two occasions, after the dot-com bubble popped in 2001 and after the global recession in 2008.

The market has largely recovered from the recession, which cut the value of the Dow Jones by over 50% and sent the market to its lowest point since the late 1990’s.

dow price chart

One thing to consider when trading the Dow Jones is the global economy. It’s not enough to look just at American performance, since most of the companies in the Dow are multinationals who operate all across the world and are affected by what happens in other stock markets.

Look to indices like the FTSE, Russell Global, and FTSE/ASEAN, as well as stock markets like those in Tokyo, Hong Kong, Shanghai, and Euronext for indications as to what the Dow Jones will do.

Contract Specifics

Dow Jones futures are offered by the Chicago Board of Trade, a subsidiary of the CME Group that also owns the New York Mercantile Exchange (NYMEX). The Dow Jones futures symbol is DJ on the trading floor and ZD on the CME Globex electronic platform.

One contract represents a certain value that is dependent on the value of the Dow Jones plus a multiplier. The multiplier for this contract is $10, so to find the value of a contract, simply multiply $10 by whatever the current index average is.

For example, let’s say that the DJIA is currently at 13,000. One contract, then, would be worth $130,000. For every point that the average gains, the futures contract would gain $10. So, going from 13,000 to 14,000 would result in a $10,000 gain.

Futures begin trading at 7:20am Central (8:20am Eastern), 70 minutes before the stock market itself opens.

You do have to trade on margin; initial margin for a $10 Dow Jones futures contract is $6,250, while maintenance requirements are $5,000. You can actually purchase a $25 Dow Jones futures contract, which gives you a 25-to-1 leverage instead of a 10-to-1; this contract comes with a $15,625 initial margin and $12,500 maintenance margin.

Mini contracts are available with the Dow Jones futures contract as well. They operate under the symbol YM and feature 5-to-1 leverage. Initial margin is $3,125; maintenance margin is $2,500.

A Final Note

Dow Jones futures are interesting assets to trade. They are influenced by and influence the Dow Jones Industrial Average at the same time, and are completely intangible – meaning you don’t have to worry about weather disruptions, seasonal cycles, or supply/demand considerations like you would with agricultural or energy commodity futures.

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