A prediction market, sometimes called an information market or event market, is a place to buy and sell contracts whose value depends on the outcome of future events.
Prediction markets let you put your money where your mouth is (though hopefully not in your mouth, because money is really dirty). You are predicting whether or not something will happen, and earning money when you’re right.
Keep reading to learn what prediction markets do and how they operate in Canada and the rest of the world.
How do prediction markets work?
Each prediction typically involves the following elements:
Event definition: each platform (or the prediction market exchange that platform uses) defines a specific event or outcome that will be the subject of trading. For example, “The TSX will end the year above 33,000.” They will also establish which source will be used to verify the outcome and when.
Contract creation: Many contracts are binary. This just means there are only two possible outcomes for an event: YES it happens or NO it doesn’t.
Contract purchase: The price of the contract depends on the number of buyers on either side. So if a lot of people think the TSX will end the year over 33,000, the price of a YES contract increases and the price of a NO contract decreases in order to make it more attractive to buyers.
Contract trading: Instead of waiting until an outcome is resolved, participants can sell their contracts at any point in order to lock in a profit. The contract price continues to fluctuate as more traders take positions, reflecting the market’s assessment of the probability of the event occurring. If the price is better than what it was when you bought your contract, you can try to sell it at the new price.
Payout: When the event is resolved, correct contracts pay out at one dollar each. So if you were correct and had paid $0.45 per contract, you would make $0.55 in profit on each contract, minus a settlement fee from the exchange — typically between 2% and 7% of your total profit.
What events do prediction markets track?
The available events depend on where a particular market is based and what jurisdictions it operates in.
Broadly speaking, prediction markets operate across sports, politics, economics, culture, and crypto. In Canada (as of March 2026), prediction market contract trading has been approved in only three categories: 1. Economic forecasts (inflation rates, the housing market)
2. Environment forecasts (average global temperature, if it’ll rain tomorrow)
3. Financial indicators (the closing price of the TSX, the change in the price of gold)
How are prediction markets priced?
Prediction markets typically pay out $1 per correct contract, with purchase prices moving up and down like they do in the stock market. The price you pay for that contract is usually set by a central limit order book, which is basically just a place to pair buy and sell requests before each trade executes.
For example: Say the market asks: will 2026 be the hottest year on record?
Each YES contract pays $1 if that occurs.
Each NO contract pays $1 if it doesn’t occur.
If the current market price for a YES contract is $0.24, that implies 24% probability of a YES outcome. This number varies based on supply and demand. So if a lot of people are taking the position that it will be an exceptionally hot year, the price of the YES contract will go up, while the price of a NO contract will fall.
You do your research (real research — not the “I do my own research” that leads one to raw milk consumption) and decide the current $0.24 price is a deal based on the reliable sources you found indicating the year would be very hot. You buy 100 YES contracts at $0.24 each.
If temperatures end up hitting Biblical levels and this year breaks a record, you would get $100. That’s $1 for each YES contract you’d bought. Factor in the $24 you paid for them, and you would be left with $76 in profit, minus the fees. If 2026 is not a record-setter, you lose your $24 investment (but maybe save a few bucks on antiperspirant and sunscreen).
Can you trade a contract before it is resolved?
Yes. Traders don’t have to wait for the final outcome of the contract they’re trading. Contracts can be sold at any time while the scenario is live.
In the example above, if the cost of a YES contract rose to $0.36, you could sell your 100 contracts for $36, netting you a profit of $12, or 50% (minus fees).
How accurate are prediction markets?
The theoretical case for prediction market accuracy rests on the "wisdom of crowds" — the idea that a large group of people, each acting based on their own knowledge and with real money on the line, will collectively arrive at a more accurate estimate than any single expert.
But studies comparing prediction market accuracy to other polling methods have been mixed. Some, like this one from the University of Arizona, show that prediction markets are better at reacting to new information than polling. Others, like this one from two Vanderbilt University professors, found that prediction markets are not efficient or notably accurate predictors of election outcomes.
It can be useful to look at prediction market contracts as a poll — and one that can hypothetically have an unlimited sample size — that can provide valuable insights into the political, social, and economic factors that affect trading.
Because of this, prediction markets have been positioned as useful instruments for:
Corporate forecasting: Companies can use prediction markets to gather insights on future product demand, market trends, or the success of new initiatives.
Policy analysis: Governments and policymakers can leverage prediction markets to gauge public sentiment, assess the likelihood of legislative outcomes, or evaluate the effectiveness of policy interventions.
Research and development: Prediction markets can be used to facilitate research and development efforts, allowing participants to trade on the probability of scientific breakthroughs or the success of new product development.
Hedging and risk management: Individuals and organizations can use prediction markets to hedge against uncertain future events, effectively "insuring" themselves against potential risks.
One thing to note: prediction markets can become less accurate when liquidity is lower (i.e. fewer people are participating) and when radical uncertainty limits reliable information (often seen following tech breakthroughs, geopolitical shocks, yeti attacks, etc.).
Can prediction markets be used to complement an investment portfolio?
Some investors use prediction markets as a simpler form of options or futures trading. Instead of agreeing to buy or sell something at a certain price on a particular date (futures) or buying the right to buy or sell something at a certain price at a particular date (options), with prediction markets you can simply pick a timeline and say whether you think the price of that particular thing will go up or down in that period. Another big difference: the payout is fixed, so whether you’re a little bit right or really right, the earnings are the same.
You can also use prediction markets as a hedge against your portfolio positions. If you own a lot of stock in a certain company or industry, you can take a position that would somewhat cushion your losses if something unexpected were to happen.
Here’s an example: you strongly believe a company will beat its estimates for Q1 earnings. You can express that view by buying the stock or a call option. If you do that, however, you expose yourself to the stock price, which is influenced by much more than pure earnings fundamentals.
In this case a mercurial CEO might post something on social media that triggers a selloff minutes before the earnings call. Your position — whether you bought the stock itself or an option — would have been correct, but it would not have paid off. With prediction markets, that isn’t the case. You could take the position that the company will exceed its earnings expectations, and when that outcome proved true, you would profit, regardless of the larger stock moves.
Is there insider trading in prediction markets?
In traditional financial markets, insider trading — when somebody profits from information that isn’t available to the public — is illegal. It’s the same with prediction markets. Exchanges are legally required to monitor, detect, and enforce rules against insider trading. They do this using various methods, including imposing position limits, utilizing market surveillance algorithms, and increasing transparency through real-time prices and volumes. As with any new technology, best practices continue to evolve.
