When you cast your vote each election, you never know for sure if your candidate will win or what she’ll do once in office. Voting is a gamble, right?
But why wager just your hopes and time? Why not bet some money on those elections? You can make hundreds of dollars placing your bets in a political futures market.
The Iowa Electronic Markets (IEM), at the Henry B. Tippie College of Business (part of the University of Iowa), are described as “prediction markets.” They’re used for research purposes and as teaching tools. But in order to be useful for studying trader behavior and the predictive ability of markets, they’re also real-money futures markets. You invest by placing bets on the outcome of various political and economic events.
The political markets are where the action is, especially during presidential races. But even during mid-term election cycles there are bets to make. For example, the 2014 Congressional Election Markets have 11 different contracts you can buy or sell. These are “winner-takes-all” contracts that pay $1 if the specified outcome happens — we’ll explain in a moment.
Placing Your Bets
Although you won’t pay commissions when you trade on the IEM, you do have to pay a one-time fee of $5 to open an account. Fill out the simple application form, make out a check to the University of Iowa for your initial investment (plus the $5 account-activation fee), and soon you’ll be ready to start trading (or gambling, investing — whatever you want to call it).
Now, to explain how the system works, let’s look at how to bet on the Democrats gaining seats in the Senate this fall. First you read the prospectus for the 2014 U.S. Senate Control Winner-Takes-All Market. You note the symbol used for the contract you want to buy. In this case “DS.gain14″ is what you’re looking for. The payoff is stated clearly:
DS.gain14: $1 if the Democrats have more than 53 Senate seats; $0 otherwise.
According to the price quotes page, the price for “DS.gain14″ is $0.04 as I write this post. Clearly, the market considers the possibility of the Democrats gaining seats to be a long shot. A price of four cents per contract suggests that the market estimates there is only a 1-in-25 chance of that happening.
Maybe you like long shots, so let’s say you buy 2,000 contracts for a total of $80. Now, you could wait for Election Day. In that case, you’ll either lose all of your money or have a $2,000 payday (not bad for an $80 bet), because the contracts will pay off at $1 each or nothing.
But you can also sell some or all of your contracts prior to expiration. Active traders might buy and sell the same contracts many times prior to an election. Its historical price graph shows that DS.gain14 traded as high as $0.15 earlier this year, so maybe it will bounce back to at least $0.08 at some point, and you can sell for a nice 100% gain.
Or, if it hits $0.08, you could sell 1,000 of your shares to get back your initial investment, and hold the rest for a possible long shot payoff of $1,000. As you might imagine, traders use many strategies, just as they do in stock or commodities markets.
The Fine Print
Before you get too excited with the possibility of turning your incredible political prediction skills into a living, I should point out a couple things. First, you can only fund your account with a maximum of $500. If you lose that initial investment, you’re done, which might be a good thing. Of course, if you bet on the long shots you can win more than $500, as in our example above.
The other problem is that this is not the New York Stock Exchange; it is a small marketplace. As a result, there may not always be enough sellers to enable you to load up on those long shots. And trying to buy thousands of contracts at $0.04 might cause the price to rise, making it more difficult to buy as many as you wanted.
In other words, this is just a fun way to gamble on politics, and perhaps make a little extra cash. You won’t get rich, but you’ll also never lose more than $500.
Your Turn: Would you consider betting on elections?