How you could make cash on a Donald Trump victory: Don Pittis

A turn in the U.S. presidential polls may mean there's money to be made from Republican candidate Donald Trump.

Lately it has seemed that Trump's stock, in the figurative sense, had nowhere to go but down. Now early signs of a rebound may mean you could make a profit from buying actual presidential futures contracts on the Iowa Electronic Market.

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Of course, you could also lose your shirt, but that's market capitalism for you. And yes, we're talking real money.

Lately Trump has altered his position on immigration, although it is not clear yet whether the Mexican wall is on or off. And Trump has clarified his position on whether gun-loving supporters should shoot Democratic candidate Hillary Clinton.

Canadians can invest

Whatever the reason for a shift in the polls, if you can see it coming, now's your chance. You don't have to be an American voter. Just go to the website and open an account.

"Traders can buy and sell real-money contracts based on their belief about the outcome of an election or other event," says the IEM website. "Using the wisdom of crowds, the price of a contract at any given time is a forecast of the outcome."

And the best part is, you can make money even if the candidate you hope or expect to win doesn't win. There are several ways to do it, but the simplest is to buy a contract low and sell it high.

"You can buy it and then sell it to another trader at a higher price sometime between now and the election," says Tom Rietz, professor of finance at the University of Iowa, who helps run the market.

Watching for spikes

There's a winner-takes-all market where investing in the ultimate winner earns a dollar per contract on election day and the loser gets nothing. There's also a market based on the share of the vote garnered by each candidate.

And if you look at the trading in both markets, in May for instance, or during some spikes in July, there has been plenty of room for profit. And there could well be more ahead.

For Rietz and his academic colleagues, the purpose is understanding how markets work. Including the way markets protect people from their own biases. Nor is the IEM the only political market — they've also been set up in Canadian elections.

"One of the things that's been noticed going way back in political science is that people who have a party affiliation have a biased belief about the probability that their candidate will win," says Rietz. 

Despite such biases, even large purchases in favour of one candidate or the other don't distort the market for long and the market has repeatedly been shown to be more accurate than the polls. Although the maximum permitted stake is $500, the market is big enough to be highly liquid, which means when you want to sell, there is always a buyer.

One of the reasons for the superiority of the market versus a poll is that rather than answering who you will vote for, traders in the market use their money to "vote" on what they think everyone else will do.

Constant trading

"In the privacy of their own homes where they do the trading, they actually put the money where they really believe the outcome is going to be, rather than where their own political preference might be," says University of British Columbia economics professor Werner Antweiler, director of the Sauder School of Business Prediction Markets.

Antweiler, who has run markets similar to Iowa's on provincial and Canadian federal elections, says another reason for the accuracy of political markets is that investors are politically sophisticated people who don't just buy and hold.

"A lot of people are constantly trading. They react to the arrival of news and that is what's driving the forecasting ability of these markets," says the UBC economist.

So what if a supporter of Clinton or Trump tries to manipulate the market through a program of buying? Antweiler says that's just free money for other traders who know what's really happening.

But polls can change. There are more than two months till the election. The University of Iowa's Rietz says a sure bet on a Clinton win would mean the winner-takes-all chart would be showing something more like a 95 per cent advantage for the Democrats.

He says the market shows that right now, Trump really does have a one-in-four chance of victory.

"It's not a done deal at this point," says Rietz. "Even though the market is efficiently predicting a 75 per cent probability, the likelihood that Trump will win is the same as if you flipped two coins in a row and both came up heads."

Follow Don on Twitter @don_pittis

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