Prediction Markets 101: Read This Guide Before You Start Placing Bets

With loose regulations and easy access, prediction markets are rapidly gaining popularity. You've probably seen the ads: Download an app like Kalshi and try to make money wagering on the outcome of real-world events.

It sounds simple. Correctly predict the result — on markets in sports, geopolitics, finance and more — and cash in. "Imagine transforming your insights and predictions about the future into tangible assets. That's the reality we're offering at Kalshi," the New York-based company’s website advertises.

That loose regulatory environment and ease of access is resulting in more prediction market platforms entering the space. Polymarket is relaunching in the U.S. following a regulatory ban in January 2022. DraftKings recently announced a "super app" that will include predictions, and FanDuel has teamed up with CME Group to offer FanDuel Predicts, which will reportedly be available in 50 states. Other high-profile names from the financial services sector that are integrating predictions include Robinhood, Crypto.com and Coinbase.

As millions of users now use these platforms, which are operating almost nationwide (for now), it's easy for newcomers to overlook some basics that everyone should understand. But if you're interested in prediction markets, it's important to remember the rules of responsible gambling — even if the industry prefers to avoid that term. Chief among them: Never wager more than you can afford to lose.

Before joining Kalshi or Polymarket, the two most popular services, or signing up for one of their competitors, here are five things you need to know before placing your first bets on prediction markets:

Understanding contracts and ask prices

On a prediction market, users buy and trade contracts tied to "yes" or "no" outcomes. Each contract settles at $1 if the event occurs and $0 if it does not. The sources or methods that will be relied upon to determine the resolution will be listed on the market page.

As an example, at press time on Kalshi, a user can either purchase a contract for Vice President JD Vance to become the next presidential election winner in 2028 for 19 cents, or pick the "no" contract — an option that pays out if Vance is not inaugurated as president in January 2029 — for 81 cents. Assuming there are no fees, you would need to buy $81 of those "no" contracts for a $100 payout.

"Prediction markets are more peer-to-peer than sports betting, but the actual functioning of the market might be more similar than people think," says John Holden, a business law professor at Indiana University.

For each contract, there are bid prices (i.e., what buyers are offering) and ask prices (i.e., what sellers are seeking). In other words, the ask price is what you could actually buy the contract for at any given moment. Be mindful that third-party companies are often participating in markets, providing liquidity by bidding at discounts.

"In theory, a prediction market would operate like a financial market where you're matching buyers and sellers collectively," Holden says. "The reality… is oftentimes we're just buying from a market maker."

The ask price may have a gap or "spread" (as it's formally called) from the bid price, similar to bid-ask spreads in equity markets, which can eat into your profits if you're not careful. To avoid that, limit orders — like with buying stocks — allow users set their own prices and wait for a match. But limit orders have one big drawback: They can be risky during fast-moving events or live action since there is no guarantee your order will be filled.

Fees and costs: How prediction markets make money

Like any other form of gambling, the house is going to take its cut. Prediction markets do so by charging fees when contracts are purchased. These trading fees are often in the range of 1% to 3%, according to Holden.

For example, Kalshi's general fee is calculated with a formula in which fees = (0.07 x [the number of contracts being traded] x [the price per contract] x (1- [the price per contract]). Don't worry if that formula is confusing, but always review the dollar amount of any fees when trading.

Deposits can also incur small fees that vary depending on the prediction market platform and payment method.

Lastly, users should be aware that they may face higher costs to trade in lower volume markets due to larger spreads. And when a user goes to cash out a position, they may see a "slippage" warning, which means the sell price is low because there isn't enough trading activity on the other side, similar to illiquidity in the stock market.

Prediction market availability and regulation

Prediction markets are currently available in most states, but they are also being challenged by lawsuits nationwide, with some legal experts anticipating that their fate could ultimately be decided after reaching the Supreme Court.

"We're getting new opinions seemingly every week," Holden says. "I'd expect a lot of legal turmoil to continue while states and the traditional gaming regulators fight with the prediction market industry."

In some instances, prediction markets may be available even in the 11 states where sports betting is illegal. That's because they are being regulated at the federal level by the Commodity Futures Trading Commission, and under the Trump administration, these companies have been allowed to operate despite ambiguity about them qualifying as commodities.

"There are a number of states that have sued to prevent these markets from operating within their borders, and for some of these jurisdictions, the markets have put in place so-called geofencing to say that if you reside in a certain jurisdiction, we will not let you trade on these markets," says Todd Phillips, an assistant professor of law at Georgia State University.

DraftKings Predictions reports some degree of availability in 47 states, for example. One of the exceptions is Ohio, where a judge recently ruled against Kalshi in a challenge to sports prediction markets.

Dozens of states are arguing that prediction markets should be subject to state regulations like sports betting sites are.

"The reason that they're using the word 'contract' and not 'gambling' is legal reasons," Phillips says. "It's important for readers to recognize that no matter what it's called, it is betting on whether something will or will not occur — or what the outcome of a sports game is — and you are entering into contracts with someone who is more sophisticated than you are."

Are markets safe if there's insider trading?

In February, Kalshi released a blog post detailing actions it had taken in two cases of insider trading. In one, a since-fired editor for the YouTuber Mr. Beast had allegedly traded around $4,000 on markets related to his former boss. Kalshi also said it has opened more than 200 investigations in the past year.

It's likely that more improper trading is going on undetected, given how many insiders have access to knowledge ahead of the public that could give them an edge. This raises the question: How can individual users trust that they are not buying and selling contracts in a market potentially containing an insider or insiders?

"We don't really have any way of knowing how big of a problem this might be," Holden says. "This is one of the big questions out there."

He notes that financial markets — and sports betting markets — have faced many insider trading scandals of their own, and people have continued to invest.

"The same thing is to be expected here. It's a risk that happens with a market system," he says.

Prediction market risks

One recent analysis by Jordan Bender, managing director of Gaming Equity Research at Citizens, found that new users of prediction markets typically lose money faster than users of sports betting apps like DraftKings. That’s even more reason to be cautious, given that sports betting can be financially detrimental, even impacting credit scores in areas where it's been legalized.

Kalshi offers resources to users to reduce risk, including deposit limits and trading breaks. Still, the critics of prediction markets argue that it's not smart for consumers to use them at this time.

"Normal people should not be trading on these at all," Phillips says. "You're trading against financial institutions that have much more sophisticated computer models than you have. And so just like gambling, you're going to lose."

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