A Political Investment?
By Steve Gillman
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.
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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.
Use the resources below to get a better understanding of how
these markets work.
Iowa Electronic Markets - It is free to open an account,
but your "political investment" is limited to $500.
- A good overview of what a "prediction market" consists
of, and information on the Iowa Electronic Market.
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