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Trading Futures and the E-Mini Dow, Dax and Russell Explained

What is a Futures contract? If you took Economics in the eleventh grade you probably know what a stock is and you have at least heard of the S&P 500. The Dow Jones and Nasdaq probably ring some bells too. But what is a Futures Market and is it the right market for you and your money?

The beginning of futures trading is elusive. Some say it began in Ancient Greece when Thales discovered how to turn a profit on a bumper crop of olives. Others say it began in Japan in the 18th century with the trading of rice and silk or in Holland with tulip bulbs. It began as a way to mitigate risk for farmers who wanted to set a price for their crops and guard against possible financial loss in the intervening time before delivery in Chicago at CBOT, The Chicago Board of Trade in 1848. Over the years the futures market has expanded to include livestock, metals, energy, and currency. A futures contract is a standardized agreement to buy and sell an asset for a price agreed upon today with actual payment and delivery to happen at a final, later date, called the delivery period. So as with stocks you are buying a portion of ownership in a company, with futures you are actually buying a good to sell asset at a future date and by selling the contract before the delivery period, avoid taking delivery of the physical product. So when you buy a futures contract you are speculating that the demand for that product will increase or supply will fall, and thereby increase your profit by the time you go to sell it before the contract expires. You can sell a futures contract before you buy it as well, simply buying it back prior to the delivery period. Starting in the 1970’s, Financial futures began trading out of Chicago at the CBOT and Chicago Mercantile Exchange or CME.

This brings us to E-minis. E-minis are futures contracts that represent a fraction of the value of the standard futures S & P 500. These contracts are traded electronically, hence the “E”, on the Chicago Mercantile Exchange’s Globex electronic trading platform and The ICE Exchange. They are appealing to investors as they generally require lower margins, and less money, to begin trading than the full size futures contracts. In futures trading, the term “margin”, refers to the minimum amount of money the trader must have in his or her account to insure against losses and enter the market , also known as a “Good Faith” deposit.

Much the same way the Dow, or the Dow Jones Industrial Average, is an index to gauge the performance of the stock market, the E-Mini Dow is an index to gauge the overall performance of the futures market. You might also hear the E-Mini DAX (Deutscher Aktienindex) which is the futures for the German stock market and is also widely referenced to gauge the market’s performance. Additionally, there are other ways to assess the movements that are happening in the market. The E-mini Russell 3000 and the E-mini Russell 2000 are two of them. Where as the Dow Jones and the S&P 500 track a relatively small and select group of the largest companies in the market, like Walmart and Apple , the Russell tracks the 3,000 largest publicly-traded companies in the U.S. Stock Market. The Russell 3000 represents approximately 98% of the investable U.S. equity market and therefore has a much wider breadth of the entire market and what it’s doing. Respectively, the Russell 2000 measures the performance of the middle and small capital stocks and is the most widely quoted measure of these smaller companies’ performances.

It is important to understand how to read these gauges because the futures market has the potential to move quickly in reaction to a variety of external factors. It is highly advisable to have a well-informed broker on your side as the prices of futures can shift day to day. However, with risk also comes the opportunity for great financial gain. If you have equity that you are looking to trade, Cannon Trading, can help you with the knowledge, tools, and guidance you need to nurture your financial future.