7 Things You Must Know About Prediction Markets

Why This Matters Right Now

Prediction markets are everywhere. Apps like Kalshi, Polymarket, and new offerings from DraftKings, FanDuel, and Robinhood are making it easier than ever to wager on real-world events — from presidential elections to sports outcomes to weather forecasts.

But "easy to access" doesn't mean "easy to profit from." Before you download an app and start trading, here are seven things every beginner absolutely needs to understand.

1. You're Buying Contracts, Not Placing Traditional Bets

On a prediction market, you buy contracts tied to a simple "Yes" or "No" outcome. Each contract settles at $1 if the event happens and $0 if it doesn't.

Here's a concrete example: Say there's a market asking, "Will JD Vance win the 2028 presidential election?" You might see the "Yes" contract priced at $0.19 and the "No" contract at $0.81. If you buy "Yes" for 19 cents and Vance wins, you get $1 back — a profit of 81 cents per contract. If he doesn't win, you lose your 19 cents.

What You Buy	Contract Cost	Payout if Correct	Payout if Wrong
"Yes" contract	$0.19	$1.00	$0.00
"No" contract	$0.81	$1.00	$0.00

The price of a contract roughly reflects the market's estimated probability of that event occurring. A 19-cent "Yes" contract suggests traders believe there's roughly a 19% chance of it happening.

2. The "Spread" Can Quietly Eat Your Profits

Just like in the stock market, prediction markets have bid prices (what buyers offer to pay) and ask prices (what sellers want to receive). The gap between them is called the spread.

Why does this matter? If you buy a contract at the ask price and immediately try to sell it at the bid price, you'd lose money — even if nothing about the event has changed. Think of it like buying a car: the moment you drive it off the lot, it's worth less than what you paid.

Tip: You can place a limit order to set your own price and wait for someone to match it, similar to buying stocks. The trade-off? During fast-moving events, your order might never get filled.

As business law professor John Holden of Indiana University explains, "The reality is oftentimes we're just buying from a market maker" — a third-party company providing liquidity, not another individual bettor.

3. Fees Add Up Faster Than You Think

Like any form of betting, the platform takes a cut. Prediction market trading fees typically range from 1% to 3% per transaction. That might sound small, but frequent trading makes those costs compound quickly.

Here are the main costs to watch for:

• Trading fees charged when you buy or sell contracts, often calculated using formulas based on contract price and volume
• Deposit fees that vary by platform and payment method — credit cards often cost more than bank transfers
• Slippage that occurs when you try to sell a position but there aren't enough buyers, forcing you to accept a lower price than expected
• Wider spreads in low-volume markets where fewer people are trading, meaning you pay more to enter and exit positions

Tip: Always review the actual dollar amount of fees before confirming any trade. Don't just glance at the percentage.

4. Regulation Is a Moving Target

Prediction markets currently operate in most U.S. states, but their legal status is far from settled. They're regulated at the federal level by the Commodity Futures Trading Commission (CFTC), not by state gambling regulators — and that distinction is at the heart of an ongoing legal battle.

Dozens of states argue that prediction markets are essentially gambling and should follow state-level regulations, just like sports betting platforms. Some states have already taken action: an Ohio judge recently ruled against Kalshi in a challenge to sports-related prediction markets.

"We're getting new opinions seemingly every week," says Holden. "I'd expect a lot of legal turmoil to continue."

What this means for you: the market you're trading on today might not be available in your state tomorrow. DraftKings Predictions currently reports availability in 47 states, but that number could shift as lawsuits progress.

5. Insider Trading Is a Real Concern

In February, Kalshi revealed it had investigated two cases of insider trading. In one case, a fired editor for YouTuber MrBeast allegedly traded around $4,000 on markets related to his former boss. Kalshi also disclosed it had opened more than 200 investigations in the past year.

The uncomfortable truth? It's likely that more improper trading goes undetected. Anyone with advance knowledge of an event — a company employee, a political insider, a media producer — could potentially profit before the public learns the news.

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

Traditional financial markets and sports betting have faced similar scandals. It's an inherent risk of any market system — but one worth understanding before you participate.

6. New Users Tend to Lose Money — Fast

Here's a sobering data point: research by Jordan Bender, managing director of Gaming Equity Research at Citizens, found that new prediction market users typically lose money faster than users of sports betting apps. That's a striking finding, given that sports betting itself has been linked to declining credit scores and rising bankruptcies in states where it's legal.

Why do beginners lose so quickly? Several reasons:

• They underestimate the impact of fees and spreads on small trades
• They trade on gut feelings rather than informed analysis
• They're competing against sophisticated financial institutions running advanced computer models

As Todd Phillips, assistant professor of law at Georgia State University, puts it bluntly: "You're trading against financial institutions that have much more sophisticated computer models than you have."

7. Responsible Limits Are Non-Negotiable

The prediction market industry prefers words like "contracts" and "trading" over "bets" and "gambling" — but the financial risk is the same. You can lose every dollar you put in.

Before you start, set clear boundaries:

• Set a deposit limit — most platforms like Kalshi offer this feature built in
• Never wager money you can't afford to lose — treat it like entertainment spending, not an investment strategy
• Take trading breaks — stepping away prevents emotional decision-making after a loss
• Track your results honestly — winners are memorable, but losses add up quietly

Remember: The industry term is "contract," but as Professor Phillips notes, "No matter what it's called, it is betting on whether something will or will not occur — and you are entering into contracts with someone who is more sophisticated than you are."

The Bottom Line

Prediction markets are a fascinating way to engage with real-world events, and they can provide valuable signals about public sentiment and probability. But they are not free money, and they are not without risk. Understanding how contracts work, what fees you'll pay, who you're trading against, and where the legal landscape stands will put you miles ahead of most newcomers.

Start small, stay informed, and never risk more than you're genuinely comfortable losing.