Also known as an election prediction market, an election stock market is a type of financial market that focuses on the future values of the contracts listed in the marketplace, rather than the current values. In this sense, financial markets of this type are similar to futures exchanges that involve accurately projecting the future movement of commodities and other assets in order to generate returns. The level of risk associated with participating in this type of market varies, depending on the individual contract and how accurately the investor is able to project the outcome of the investment.
As the name implies, the type of contracts traded in this marketplace are connected with the outcome of political elections and the ramifications of any changes that are made in the balance of power between different political parties. By predicting the outcome of an election, the investor can also project the likely impact of that outcome on the economy. In order to accomplish this goal, the investor must have a strong understanding of both the political scene and its relationship to the economy, including how political activities can impact the production of goods and services, as well as the response of consumers to the availability of those products.
There are some examples of the election stock market that are operated mainly for research purposes. Those particular marketplaces tend to encourage modest investments while also choosing to not charge any type of fees or provide commissions to brokers who manage the transactions. More recently, privately operated election markets have become more common. With these types, fees are charged and commissions provided in a range that is somewhat similar to other markets.
Within the scope of the election stock market approach, there are a couple of alternatives. One strategy is known as the winner take all market. Here, one contract will pay out a fixed amount, while other contracts that do not quite match the predicted outcome pay out nothing. The terms of the contract determine if a winner take all approach is the focus. For example, if the contract stipulates that a specific candidate must win by at least a certain margin, the contract that specifies that margin will be paid. If other contracts also identified the same candidate as the winner but failed to identify the right margin of votes, they would receive nothing from the investment.
A different scheme in an election stock market calls for a sharing situation that allows several related contracts to receive some sort of payout. This approach may call for payouts based on the proportion of gains or losses that a given party makes in a given election, or even the amount of majority votes that are captured for a given referendum that was on the ballot. The amount of the payout on each contract will vary, based on the terms associated with the contract.
Typically, an election stock market functions by the buying and selling of contracts on the market. The purchase price of the contracts is normally a fraction of the anticipated generation of revenue if the results of the election are favorable to the terms of the contracts. This means that an investor who pays a tenth of the anticipated future value of a contract stands the chance of earning a decent level of return, assuming that the election goes as predicted. At the same time, the amount of loss is kept to a minimum, owing to the relatively small investment that is made in the contract at the time of purchase. As the election grows nearer, some investors may choose to sell their contracts as a means of avoiding a portion of that loss.