Prediction Markets Let You Bet on Just About Anything — But There Are Risks
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What are prediction markets and how do they work?
podcast. I'm Tess Vigeland, in for Sean Piles. And I'm Anna Helhosky. And this is our weekly money news roundup, where we break down the latest in the world of finance to help you be smarter with your money. We'll go deep into a single topic, then leave you with the latest money headlines. Today, we're talking about prediction markets. These are companies like PredictIt and Kalshi. We're going to talk about what they are, how they work, and how the election has raised their profile. Joining us is Sam Taub, the writer of the Nerdy Investor email newsletter. Sam, thanks for joining us again. Happy to be here.
So you've mentioned prediction markets in some previous episodes. You've also mentioned something called an event contract. So let's start with that term. What are event contracts?
What is an event contract?
An event contract is a type of investment instrument that lets people speculate on whether a particular event will happen or not. That event might be something finance-related, like will the S&P 500 close above 7,000 points by the end of the year? It can also be a political question, like will Donald Trump win the presidential election? Or it can also be something sports or pop culture related. In the last couple of weeks, people have used Polymarket and have traded event contracts on Polymarket to speculate on the outcome of the Mike Tyson, Jake Paul fight. Event contracts can cover any kind of yes or no question that will get a definitive answer at some point in the future.
And how do these things work?
Event contracts have a face value in dollars, and that's typically $1 per contract. But in the lead up to the event in question, traders can buy yes or no positions on the contract for some amount between $0 and $1 that is determined by the market. It's the market's odds that the thing will happen. Once the event happens, or doesn't happen as it may be, and we get a definitive yes or no answer to the question, then the contract pays out $1 to whoever was right. For example, suppose you paid 25 cents for a yes position on a contract about whether the S&P 500 will close above 7,000 by the end of the year. then suppose that actually happens. You'd receive $1 from your 25 cent investment, so you'd be quadrupling your money. And if you bought a 25 cent yes position on 1,000 contracts, you'd get $1,000 from an initial investment of $250.
So event contracts let you bet on future events. What are prediction markets?
Prediction markets are the online trading platforms where people can buy and sell yes or no positions on event contracts. Predicted and Polymarket are some of the biggest prediction markets, although Polymarket's technically not available in the US. There's also another big one called Kalshi. Then there are a couple of conventional stock brokers, Robinhood and Interactive Brokers, that actually operate their own in-house prediction markets. There are a couple different ways to make a profit in these kinds of markets. You can either buy a position and hold it until the event in question and make money if your prediction was right. You can also potentially buy a position and then resell it to another trader for a higher price before the event in question.
All right, Sam. Honestly, this sounds a little bit like gambling, and some listeners might be surprised to hear that you are allowed to bet on elections. That's legal?
That's a good question and an unresolved question. Yes, prediction markets are definitely one of those things that's kind of in a gray area between high risk speculation and gambling, along with small cryptocurrencies and meme stocks and things of that nature. When it comes to the legality of these things, that is also an open question. Until recently, as you mentioned, election betting has generally been considered illegal in the U.S., in part because there's a concern that it could harm election integrity. It could create an incentive for someone to stand for an election as a candidate and then lose deliberately for a betting market payout or something like that.
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Chapters
6 chapters
1
What are prediction markets and how do they work?
0:08–0:52
2
What is an event contract?
0:52–6:29
3
Is it legal to bet on elections in the U.S.?
6:29–10:21
4
What are the risks of prediction markets?
10:21–12:32
5
How are prediction markets regulated?
12:32–13:40
6
What does Trump's election victory mean for prediction markets?
13:40–13:42
Speakers
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