Have you heard of the New York Stock Exchange, How about the Dow Jones Industrial Average? NASDAQ? I have one for you that I bet you haven’t heard of: Intrade. Intrade doesn’t trade stocks or bonds. Instead it trades futures contracts but not the kind you may have heard of. Here are a couple examples of their contracts:
The Curious Case of Benjamin Button to Win the Oscar
Dow Jones to close ON or ABOVE 7750 on 27 Feb 2009
Microsoft Windows 7 to be released on/before 30 Sep 2009
As you can see, these contracts aren’t your normal contracts although they work in a similar way because you can buy and sell these contracts at any time before the expiration date.
How does this work?
Every contract trades between 0 and 100. Let’s take one of the contracts above as an example. If The Curious Case of Benjamin Button wins the Oscar, the contract will close at 100. If the movie doesn’t win the Oscar, the contract closes at 0. Keep in mind that while the contract is open, the price will move between 0 and 100 based on the actions of the investment community. It moves exactly like a stock.
None of this means anything if we can’t relate the 0 to 100 scale to a monetary scale. Think of the number in terms of points. 1 point equals 10 cents. So let’s say that The Curious Case of Benjamin Button won the Oscar again. A while back we bought 1 contract at 63 points. When the movie won, it went to 100 points which means we made 37 points. If we multiply that by 10 cents, we’re getting paid $3.70 for our 1 contract.
Of course there are fees for trading on this exchange. Intrade charges 5 cents per contract so once we subtract fees, we made $3.65 on our win. Of course you can buy more than one contract at a time. If we would have bought 10 contracts, we would have made $37.00 minus the 50 cent Intrade fee so $36.50 is our profit.
Intrade isn’t going to be a core investment strategy but it can be a fun, low cost way to speculate. I have to note that I personally find this to be more similar to betting than investing but when done with very low quantities of funds, it can be a fun experience. Do not use this as an investment strategy.
For more information, go to www.intrade.com