Investing in Dow Jones Futures: Risks & Rewards

what are stock futures - dow jones futures

Investing in Dow Jones Futures is a Gamble, But Here’s a Jumping Off Point if You’re Motivated.

Dow Jones Futures, typically known as Dow Futures, are basically bets on the future of the Dow Jones Industrial Average (DJIA) market index. Will it rally? Will it take a dive? Guess!

In case you’re new to investing in futures, here’s a quick recap. Futures are contracts to buy or sell stocks or bonds, or commodities, at a stated price at a stated time in the future. Most commodity futures contracts come due within three or six months. You can buy and sell single stock futures or stock index futures, which are contracts based on the performance of a broad index such as the Dow Jones.

When you purchase or sell a stock future, you’re not buying or selling the underlying stock. You never really own the stock. You’re engaging in a futures contract, which is an agreement to buy or sell the stock certificate on a certain date at a fixed price. Think of it like this: Hypothetically, if you could pre-pay for gallons of gas for your car a week in advance, and you pre-pay for 20 gallons at $2.20 per gallon on Monday. On Friday you go to fill up with your tank with 20 gallons. On Friday, the gas could have raised to $2.45 and you got yourself a deal at $2.20 per gallon, or it could be $2.00 a gallon, and you lost a little money, or get a little less gas.

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You don’t really have to be optimistic about the future to take advantage of the strength of Dow Jones futures, or any futures in today’s stock markets. That’s because optimism (or pessimism) is about your attitude toward the future, not the future itself.

And the future of the market is as much a closed book to us as it is to the high-powered economists and market gurus who are so eager to deliver their opinions on every website and cable channel. That’s why we call it a gamble.

The Benefits of Investing in Dow Jones Futures

There are benefits to investing in Dow Futures, the biggest one being that these futures are multiplied by 10. That means you can invest less and win more. For example, if Dow Futures are trading at 5,000, that means their market value is $50,000. Additionally, if the Dow Jones Industrial Average increases by just a dollar, the futures contract increases by $10.

If you’re confident in a market spike, and it actually happens, you can make a lot of money. The downside, is that if it doesn’t, and if it falls, you also lose.

Should You Invest in Dow Jones Futures?

If you’re a jumpy investor, investing in Dow Jones futures, or any futures, may not be your game.

The night Donald Trump was elected president, Wall Street panicked. Stock market futures plummeted, with Dow Jones futures leading the way, falling as much as 900 points as the shock of Trump’s surprise victory set in. By the next day, that panic was magically gone, and all three U.S. stock market indexes were up slightly.

The forces of seasonality are always affecting the stock market, and when you add a presidential election year to the mix, you should know that the market will always be influenced by the effects of the Presidential cycle, and Dow futures may be at the front of the line.

If you’re not paying attention to Dow Jones futures or any stock market futures, you probably won’t notice when Wall Street panics, and that’s a more comfortable investing strategy. If you simply wake up, read the newspaper (what a quaint idea!) to see how your stocks and the market as a whole performed the previous day, then watch CNBC a bit around lunch time, Dow Jones futures may not matter to you. In a time of such wild—and immediate—off-hours overreaction, ignorance can be bliss.

Dow Jones futures can be an interesting barometer of what to expect in the next day’s trading, but we don’t recommend trading them or buying and selling stocks based on futures. If you pay close attention during elections, it’s possible they could influence you to make a rash decision and needlessly sell out of perfectly good positions the minute markets opened the following day. By the time the next closing bell rolls around, you might have realized you’ve made a huge mistake.

If that’s something you’re worried about, it’s probably best not to invest in Dow Futures. In today’s 24-hour news cycle filled with multiple investing-related cable channels that draw eyeballs by instantly reacting to every market-driving (and futures-driving) event with an extreme take—either panic or euphoria—you’re better off tuning it all out. And if you’re using futures as an indicator of whether you should buy or sell, pay closer attention to the stock charts—which, tellingly, do not include share price movement in the hours that are not between 9:30 a.m. and 4:00 p.m. eastern time.

Do you invest in Dow Futures? Would you recommend it to other investors? Why or why not?

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