How Does Intrade Work?

by Michael on Nov 5, 2012

Intrade Logo

After seeing Intrade mentioned time and time again in connection with the upcoming election, I finally gave in and decided to check it out.

If nothing else, I figured it might be fun to have something more than the future of our country riding on the outcome of the election. So why not “invest” in (i.e., place a bet on) the identity of our next President?

Alas, I was foiled by the available funding options and was thus unable to buy any shares. But I did learn a bit about how it works. It’s actually pretty interesting (at least to me), so I thought I’d share what I learned…

For background, Intrade is essentially a market-maker that facilitates investing in all sorts of everyday occurrences. Or perhaps they’re a bookie that facilitates betting on all sort of everyday occurrences… Po-tay-to, po-tah-to.

Market categories

Right now the system is (not surprisingly) dominated by election-related happenings but there’s a ton of other stuff on there, too.

Currently, the categories include:

  • Business
  • Climate and Weather
  • Construction & Engineering
  • Current Events
  • Entertainment
  • Financial
  • Foreign Affairs
  • Legal
  • Politics
  • Real Estate
  • Scientific
  • Social and Civil
  • Technologies

In most cases, these categories are further subdivided and contain multiple prediction markets. Thus, there are a bunch of options available.

Framing the options

Without exception, the Intrade prediction markets are presented as a strict dichotomy. It’ll either happen or it won’t. You can buy/sell shares based on what you think will happen. But…

Prices fluctuate between $0-$10 based on demand. So if you think something will happen, you can buy shares. If you think it won’t happen, you can sell shares — similar to shorting a stock.

Once the outcome is known, all investments are settled at either $0 or $10 depending on what actually happened. For example…

If you buy at $7/share and the event happens, you’ll pocket a profit of $3/share — $10/share minus your $7/share purchase price. If you sell at $7/share and the event doesn’t happen, you pocket $7/share — your sale price minus the final value.

In some cases, such as the Presidential election, there are markets for both sides.

That is, you can buy/sell Obama or you can buy/sell Romney. As it turns out, these are mirror images of each other (e.g., Obama is currently at $6.40/share whereas Romney is at $3.60/share) so you can play it either way.

Funding your account

As for funding options…

This is where I ran into trouble. As it turns out, you can’t fund your account with a credit card. This is a legal byproduct of Intrade technically being considered a gambling platform. Thus, you either have to mail a check or do a wire transfer.

Since it’s so close to Election Day, I’d have to fund my account via wire transfer which isn’t worth the trouble.

What about fees?

Of course, Intrade is a business so it must be making money somehow. Right? Right.

While there are no transaction fees or commissions, there is a $4.99 monthly fee. If you don’t have any money in your account then the fee is waived. But otherwise, the fee will be deducted from your balance on the 1st of each month.

I would imagine that they also profit from the spread, which was around a nickel per share on the the Presidential election when I checked.

Final thoughts

All in all, this is a pretty cool system — and no, I don’t have a stake in this.

Because prices are continuously updated and because all trades are backed by real money, Intrade markets essentially provide a real-time estimate of the odds that something will (or won’t) happen based on investor sentiment.

So, according to the Intrade crowd, there’s currently a 64% chance that Obama will win. Will that happen? Your guess is as good as mine, but we’ll know soon enough.

While the monthly fee is a drag, it’s fun to peruse the stats and see which way the wind is blowing on various issues.

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