Ups and downs with the Dow; the news always has something to say about the opening and closing of this market index.
Although you may have been hearing headlines about the Dow Jones Industrial Average (DJIA) going up and down in ‘points’, you may not really understand what it all means or how it works.
But you are not alone!
If you want to know more about how the Dow Jones trading works and what those fluctuations mean for investors and the stock market, then by all means, read on.
How It’s Calculated
As you might have already guessed, calculating the Dow is not as simple as adding up the stocks and dividing by 30. Instead, the sum of the prices of all 30 stocks is divided by the Dow Divisor.
The divisor was introduced to be adjusted in case of stock splits, spinoffs or similar structural changes, to guarantee that these events would not alter the numerical value of the Dow.
How to Trade
Although you can’t trade a stock index directly, brokers are available in the market who allow you to choose the direction you think the index will move, and profit from your choice if you got it right.
You will need to check out the various brokers in terms of the level of service provided, the type of trading software offered, and whether or not the broker provides trading consultancy. Once you are happy with a broker that seems to offer what you need, you can then open an account.
You will then move on to set up the trading software provided by your new broker, and study the characteristics of the different Dow Jones funds and contracts.
It is important to understand that the larger the contract value, the larger the margin deposit required to trade it. As a new trader, you might want to start with a light $5 Dow contract.
You then have to develop a trading system or select a trade signal source for the Dow Jones index.
There are various strategies and systems available to trade on the stock indexes, and you can try out all the strategies and tactics using a simulation trading account – a tool that many brokers offer along with you live, ‘real money’ trading account for the purpose of practice.
Experience is Important
Needless to say, you should never start to trade futures with actual money until you are experienced enough and making consistent profits on your simulation account.
If you predict that the djia today will go up, you can trade the selected Dow contract by using the “buy” order to open.
Similarly, use the “sell” order to open if you expect the stock index to decline. When you enter an order, your broker will need an exchange-set margin deposit for each contract traded.
With the above few pointers in mind, at least you have a clue on how the Dow Jones works.
Additionally, though, it is also worthy of note that trading can result in significant losses out of your account and most commodity brokers will advise that you only trade with money you can afford to lose.
Make sure that you are consistently up to date with all the latest developments so that you can make calculated decisions. Good luck!