Are you considering djia futures as a trading option? These futures are among the more interesting futures that you can trade with. Many investors favor futures because they are highly speculative, which means that profits can be quite high. However, we should warn you that risks are also generally higher. As far as futures go, however, djia based futures are actually a bit lower in risk.
When you see a term in the investing world, in this case DJIA future, you need to break down the term into its smallest parts. So in this case we have “DJIA” and future. What is the djia? This stands for Dow Jones Industrial Average, which is among the world’s most widely used and respected stock indices.
So what does the dow jones industrial average mean? The Dow Jones Industrial Average index tracks 30 of the largest publicly traded American companies, spread across a range of industries. More or less, the index is meant to be a sort of barometer for stock markets in general and how investors and traders are feeling. The DJIA is effective for measuring big picture changes. For example, if the Fed changes its policies on interest rates, analysts will watch the DJIA closely to see what way it is moving.
So what then are futures?
So now you know what the Dow Jones Industrial Average is. What then is a Dow Jones Industrial Average future? Well, let’s hone in one that last word “future” to find out what it means.
Futures are easiest to think about when you think about commodities. Let’s take gold as an example, because gold futures are very popular. Let’s say a gold mine in South Africa has found a huge vein of gold. However, it needs to upgrade its mining equipment in order to tap into it. The mine could go apply for a loan for a bank, or it could sell gold futures.
With gold futures, the mine basically agrees to sell gold now in exchange for money. However, it won’t deliver it until a pre-determined future point in time. This way, the mine can get money now, but won’t have to deliver gold until some point in the future. Hopefully, by the time the future contract is due, the mine will have tapped into the new vein of gold and can then easily deliver the gold.
So basically, a futures contract is a contract in which buyers and sellers agree upon a price for a commodity, but the commodity itself doesn’t exchange hands until some future point in time. Since the exchange date is set in the future, prices could rise or fall before the due date.
The fact that prices can rise and fall so much makes futures a highly speculative investment. Neither the buyer or seller will really know what the fair price of the commodity should be for that future point in time when the contract expires. Instead, they have to guess, and this guesswork adds a lot of speculation.
So what then are DJIA futures?
It’s finally time to tie the whole thing together. By now, you should know what futures are and understand how the DJIA works. While futures initially started as a way to trade commodities, they have now evolved into more complex investment instruments. Futures are considered derivatives, meaning that their value is derived from something else.
In this case, a DJIA futures contract derives its value from the Dow Jones Industrial Average itself. This means that its price is pegged to the market index itself. So those parties engaging in trading can then trade based on the Dow Jones and guessing which way prices for the index will go.
If you buy DJIA indice based futures, you are basically guessing that prices will rise in the future. In other words, the value of the index will increase. So if the DJIA is worth 17,000 points today, and a future set six months from now pegs values at 17,200 points, then you’ll be hoping that the index itself rises beyond 17,200 points by the time the six months expires.
If the index does increase by enough value, then you will be able to collect on the difference. If prices decrease, say dow jones based futures drop to 16,500, you’ll lose money on your investment, roughly equal to the drop in value in the underlying asset, in this case the DJIA.
This might sound like complicated stuff. Honestly, futures make more sense when you start to trade in them, so if you’re confused, we recommend trading, or using a trading simulator to see how futures work. After you “play” with futures for a bit, things will start to make a lot more sense. Either way, we recommend you give futures a look because they’re a great option for trading and offer a great way to diverse your portfolio.