Wednesday, August 26, 2015

How do we know that the market is going to open "up" (or "down")?

This is a pretty basic question that most finance folks will know the answer to.   How does the media know what the market is going to do when it opens?

Turns out, the information is coming from index futures contracts that trade before the market open.  These futures contracts allow investors to bet on the price of the index (Dow or S&P) at some point in the future.   A nice explanation is on investopedia.  You can see the state of futures contracts on most financial pages - CNBC for example.

Today, the prediction was correct.  The market opened above its prior close.