Gambling on the stock market index.... A newbie question.

[BlueBear]

Hi,

Newbie question here.

I have seen several on-line sports exchange trading sites that offer contracts based on the stock market index. (eg. Dow Jones Industrial Index). For example, a contract could be that the DJIA gains 25 points over one day.

How do market index futures and options differ from these sort of contracts sold in betting exchanges? I understand the the index futures is a well established derivatives market with huge comporations using it for risk management (hedging) purposes and these index future markets cater to large corporations... But in what way are the index futures and these "betting exchanges" different?

[TGoldman]

Market index wagers and options are similar in that they're both future contracts based on the value of some underlying security. In this case, a particular market index. I believe the main difference between the two is the payout structure if your prediction is correct. Options allow you to buy/sell at a certain pre-determined level. If the index moves deeper in the money on your option, then you're going to profit even more. A market index wager is just a simple win/lose flat bet. Either the market closes above the level and you win or it closes below and you lose. It doesn't matter how much you win or lose by. The commissions/juice on the transactions is probably different also, but that depends on your bookie/broker. As a disclaimer, I've never actually purchased an option or placed an index futures wager, but that's my intuitive understanding of it. Someone please correct me if I'm mistaken.

[eric5148]

[ QUOTE ]
Someone please correct me if I'm mistaken.

[/ QUOTE ]

You're mistaken. The way it works is, you buy contracts at a certain price for or against a certain event to happen. You can sell the contracts at any time.