Definition and Example of Dow Futures
Dow futures are commodity contracts with specified prices and future delivery dates. They allow investors to speculate or reflect on the future value of stocks before the market opens.
How Do Dow Futures Work?
To understand how Dow futures work, the basic approach is to think about the farmer and the grocer. The grocer knows that the farmer will have a soybean crop harvested soon, so he offers to buy 100 bushels of soybeans in January for $900.
Where Are Dow Futures Traded?
The position you take in trading is the purchase price agreed upon with the seller. Dow futures are traded on exchanges, meaning that the transaction is made with the exchange when you establish your position (price and contract) on the commodity.
When Can You Trade?
Dow futures start trading every day on the Chicago Board of Trade (CBOT) at 7:20 AM Central Time (8:20 AM Eastern Time), which is one hour and ten minutes before the stock market opens. This allows trading to take place so correspondents and professionals can get an idea of the landscape (understanding investor sentiment regarding prices and market potential).
Buying Futures Contracts with Leverage
Dow futures come with built-in leverage, meaning traders can use much less money to trade futures contracts while achieving substantial gains or losses. This can allow traders to make large amounts due to market price volatility much more than they could achieve by purchasing stocks directly.
In summary, traders can gain insights into the future value of stocks before the market opens by trading Dow futures. These contracts give investors the chance to speculate or reflect on market performance and realize gains thanks to the built-in leverage. However, investing in futures contracts should be well thought out, and market analysis must be carried out meticulously to avoid the potential for significant losses.
Source: https://www.thebalancemoney.com/what-are-dow-futures-and-how-do-they-work-358089
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