Are you a big movie buff? Can’t get enough of overpaying for the right to watch movies with a group of people? Think you know the Hollywood business better than anyone else? Then the Hollywood Stock Exchange is for you!

Just like there is fantasy trading of stocks, playing poker without actual money, and countless other websites that allow you take chances with fake money, you can bet on the success and failure of movies, actors and more at the Hollywood Stock Exchange.

The premise is simple. Let’s pretend the original Star Wars movie was going to be released in a few weeks. The Hollywood Stock Exchange (HSX) has had a “Star Wars” stock trading for some time now. Say it’s trading at $25. This says that investors expect the movie to make $25 million in the first 4 weeks of release. If this is correct, the investors will receive $25 for each share they own. If Star Wars only makes $20 million, shareholders will only get $20 a share, a $5 loss. Keep in mind this is pretend money.

But imagine if this were a real thing. People could actually invest in movies. Why would this exist? The same reason people bet on horse raises, invest in junk bonds, and keep money in a savings account. We’re always looking to diversify our investments, and maximize return.

In order for someone to buy a stock someone must issue it. A stock is a right to future cash flows, it’s issued to people who expect to receive money in the future. The movie studios producing the films would initially sell these stocks. It would be a great way to raise funds for a particular film, or hedge their bets against potential losses. Imagine if it cost $20 million* to produce Star Wars and the studio thought they might not make any money on the movie. They could sell the rights of the cash flows to the highest bidder (let’s say $25) and let them bear the risk. The studio makes a $5 million profit and Star Wars stockholders get the cash flows the movie actually makes. If Star Wars makes $25 million then the stockholders get their money back. Anything more is icing on the cake.

Crazy as it sounds, this actually sounds like fun to a movie nut. HSX has all kinds of investments too; you can even short the stock or buy options. Thank goodness this is all with fake money though.

Well it used to be with fake money. In April, HSX is expected to go legit. As in, the stocks you buy and sell will actually be cash flow rights on movies. You can even short movies, and even be prosecuted with insider trading if so deemed guilty of such actions. Just as I explained above, this is actually a good way for movie studios to hedge their bets on certain movies. Trading will begin 6 months before a movie is expected to be released. No doubt things like delays, bad PR on the account of the star, or bad movie reviews could hurt the value of a stock, just like securities on other exchanges. Normally I’d say this is stupid, but I actually believe there is a good business case for this. Studios share risk all the time with directors, producers, and other studios. This makes for a more formal transaction and allows anyone to get in on the action. No doubt finance professors, hedge funds, and movie buff day traders will find this new exchange fascinating to watch, and perhaps profitable. We’ll see.

Read more about HSX going legit.

*Just in case you were curious, Star Wars cost $15 million to make and advertise, and in the first 4 weeks grossed around $13 million. So investors in this case would have lost $12 per share on their investment and the studio would have been lucky. Since its release in 1977, the original Star Wars movie has grossed $460 million (and that’s just the theater stuff).

By The Weakonomist

The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice.

categories: business, investing, media