A Political Investment?


What is a political investment? Well, it can be a lobbyist's contribution to a candidate--with the expectation of a "return" on the money invested in the form of beneficial legislation. But what this page is about is making money by investing in a "prediction market," Which among other assets, has contracts which allow you to bet on the outcome of various elections. If that sounds unusual, well, it is. But the idea has been around for a while.

The oldest prediction market is the Iowa Electronic Market (IEM), which started in 1988 at the Henry B. Tippie College of Business of the University of Iowa. The IEM is meant for teaching and research, but real money is bet on predictions about the future--although any individual investor is limited to a $500 investment. Anyone can open an account, and unlike normal markets, there are no transaction fees. The description given on their website says the market is: "a real-money, small-scale futures exchange in which the ultimate values of the contracts traded are determined by political events, financial events and economic indicators. Participants in these markets invest their own funds, buy and sell listed contracts, and bear the risk of losing money as well as earning profits."

In one sense this is gambling, since you bet on very unpredictable events. As such, it is one of the few ways you can legally bet on the outcome of elections. The IEM operates under the regulatory purview of the Commodity Futures Trading Commission (CFTC), but is not technically regulated by them or any other authority.

The basic idea is that contracts are created which pay out a certain amount--typically $1--if a certain outcome happens. These are then traded and go up and down in value as the market participants view of the prospects of that outcome change. For example, in the market "Congress10" run at IEM, you could buy the contract "RH_RS10" for 12 cents in early August 2010. It would pay $1 if the Republicans controlled the House of representatives and Senate after the 2010 election, and nothing if that wasn't the case. By early October of 2010 that contract was selling for 22 cents. Given that it expired worthless (Democrats retained control of the Senate), that would have been a good time to cash in.

How Much Can You Make?

I recently read a newspaper article about a young man who tripled his money in the IEM in a few months. In the example given above, had you bought 4,000 shares of RH_RS10 in August 2010 at 12 cents, your $480 investment would have been worth $880 by early October. What you can make in the IEM is limited, of course, by the maximum investment of $500. Other prediction markets allow bets of many tens of thousands of dollars, but they are operated outside of the United States because their "markets" are considered gambling, and so are illegal in the U.S.

Ways to Make More | Related Opportunities | Tips

The "big" money, to the extent that it is possible, is in the long-shots. Find a candidate who is having trouble in his campaign, or is unknown because it is early in the election season, and you might buy a $1 contracts for as little as 5 cents. In theory you could then buy 10,000 at that price and if your candidate wins, your $500 investment would be worth $10,000. In reality, though, trying to buy that many contracts in a small market like the IEM would probably not be possible--at least not without pushing the price far higher than 5 cents before you bought many shares. So you might be better off trying to bet on many different predictions, putting just part of your money into each.

You can also bet on things like whether the Federal Reserve will raise or lower interest rates, and even predictions of earnings for major companies. The IEM was started in large part to test the theory that people in large groups, when acting in their own self-interest and risking real money, can "predict" future events better than either experts or even opinion polls taken by those same people (a poll question has no financial incentive attached to it, after all). It can be a fun way to invest "play money."

Qualifications / Requirements

If you are an adult and have money to play with, you qualify.

First Steps

Use the resources below to get a better understanding of how these markets work.


The Iowa Electronic Markets - It is free to open an account, but your "political investment" is limited to $500.

http://en.wikipedia.org/wiki/Prediction_market - A good overview of what a "prediction market" consists of, and information on the Iowa Electronic Market.

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