How To Trade The Dow

E-mini Futures (US Exchange)

DIA [Diamonds] (US Exchange)

Dow Spread-Betting (European Exchange)

Dow Contracts for Difference [CFD’s] (European Exchange)

The Dow Jones Index is made up of 30 of the largest companies in the industrial sector (see DIA for the list of the 30 companies). These 30 stocks are weighted and then averaged to come up with the Dow Jones Index.

All of the Dow Jones based trading instruments track the Dow Jones Index; therefore, whenever the Dow moves up, so do the instruments.

Instead of buying all 30 stocks that make up the Dow Jones Index, it is easier to buy and sell the instruments created to track the Dow.

There are two basic strategies to take advantage of the Dow’s up and down fluctuations - leveraged and non-leveraged trading.

Leveraged Trading
Leveraged trading allows you to trade on margin for as little as 4% of the value of trading instrument. As an example, you can control $60,000 worth of wealth with as little as $2,500.

We will use the Dow E-mini Futures contract as an example to illustrate how margin buying works. The Dow E-mini is worth $5 per point, so if the Dow E-mini is trading at 12,000 [based on the Dow trading at about 12,000] it is worth $5 x 12,000, or $60,000.  The margin required to trade the Dow E-mini could be as little as $2,500; that is to say, you can own $60,000 worth of stocks for as little as $2,500. The profit and loss is based on $60,000 worth of stocks, but the deposit is only $2,500. Margin buying is a common way of utilizing the concept of leverage. There is no interest charged when trading futures on margin.

Another way of using leverage is to buy a stock for two to one leverage. In this case the stock firm lends you money with interest which allows you to buy twice as many stocks as the money in your stock account.

Buying ‘options’ is another way to leverage. DIA options are liquid and are easy to trade. Click here to learn more about options and leverage.  

Leveraged Trading
The second strategy is to trade without the leverage. DIA [Diamonds] is one of the more popular instruments, with an average volume of about 12 million shares per day. The DIA is traded on the American Stock Exchange [AMEX]. And the DIA is like a stock; therefore, it buys and sells like a stock. If the Dow Index is trading at 12,000 points, the DIA will be trading at about 120.00 points. A hundred shares of the DIA will have a value of $12,000, and $12,000 will be needed to buy 100 shares. However, like most stocks, it can be traded with a two to one leverage [margin].

Dow E-mini Futures and DIA are two of the most popular ways of trading the Dow Jones Index.