The Learn About Futures Insider: Dow Jones Industrial Average

[Guest Katie Gray]

The Dow Jones Industrial Average (DJIA) is a widely recognized name in finance. Following his nineteenth-century roots in publishing, Charles Dow’s first stock averages creation included nine railroads and two industrials. Today, the DJIA is an index of 30 companies. While exploring the history and components of the DJIA this newsletter will refer to specifications for the futures contract traded on the CME.

Contract Size: $10 x DJIA ($10) futures price

Tick Size: Minimum fluctuation is 1.00 index points=$10

Contract Months: March, June, September, December

Trading Specs: Trades open outcry and Globex (electronic) per the following schedule:

Electronic: Mon -Thurs: 3:30 p.m.-8:15 a.m. (daily maintenance shutdown from 4:30 p.m.-5:00 p.m.) Sun: 5:00 p.m.-8:15 a.m. Central Time

Open Auction: Mon-Fri: 8:30 a.m. -3:15 p.m. Central Time

Daily Price Limit: RTH: Successive 10%, 20%, 30% limits (downside only)

ETH (overnight): 5% up or down

Please consult exchange for additional details on limits.

Trading Symbols: DJ, ZD Globex

Past performance is not indicative of future results.

***chart courtesy of Gecko Software

DJIA Facts

 

The DJIA is a widely recognized stock market index and was named for Charles Dow and ones of his associates, Edward Jones. In the company’s overview, it indicates that the DJIA serves “to provide a clear, straightforward view of the stock market and, by extension, the U.S. economy” as the thirty component companies represent a diverse group. The current components and their weights are:

On June of 2009, Cisco and Travelers replaced Citigroup and General Motors. Changes have been made historically most often due to mergers. Other reasons for changes include the shifts in technologies over time.

Although the term “industrial” contributes to the name, the DJIA is meant to represent the broad market. Former components include Goodyear, Sears Roebuck & Co, Bethlehem Steel, Woolworth, Eastman Kodak, Honeywell, and many other recognizable names.

Calculating the index involves totaling the component stocks’ prices. The divisor for the average is not straightforward since it has to be adjusted to accommodate stock splits or other fundamental changes. This helps maintain continuity. According to the website for the indexes, "Over time, the divisor has been adjusted several times, mostly downward (it stood at 0.125552709 at the end of 2008), which means that it has become, in effect, a multiplier." The DJIA is often the subject of criticism since it is price-weighted and not all the components may be open for trading at the same time.

The worst and best days according to the DJIA website were as follows:

Past performance is not indicative of future results.

The worst and best years were as illustrated:

Past performance is not indicative of future results.

Key terms for this market include:

Averages Committee - As of March 2010, when Dow Jones Indexes became part of CME Group Index Services LLC, the Managing Editor for the Wall Street Journal, the head of Dow Jones Indexes research, and the head of CME Group research are the ones who select components of the DJIA.

Price weighted - For an index, this refers to the components being included based on their quoted prices.

Key Uses

 

As a benchmark index, the DJIA can be used by fund managers, speculators, analysts and rating companies as a performance standard against which they can compare their own performance or the performance of others. The DJIA futures contract has also been used to accommodate a range of both speculator and hedger trading strategies.

Key Concerns

 

For the futures contract on the DJIA, the commonly watched factors which may affect trade include economic reports or events. This may include the following:

• Retail Sales

• Unemployment Claims

• Personal Income

• PPI

• CPI

• New Home Sales

• FOMC Meetings & Member commentaries

In addition to weekly and monthly reports, corporate earnings and activities such as mergers and acquisitions may affect price and volatility. There are nearly countless national and global events that can be considered in relation to how they may affect member shares and the overall index value.

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