Are Prediction Markets a Smart Trading Strategy or Just Another Form of Gambling?

Once mostly illegal, forecast or event contracts in prediction markets are now inching into the regulated mainstream. Interactive Brokers (IBKR), one of the world’s largest electronic brokerage firms, now offers dozens of markets from ForecastEx straight onto its Trader Workstation, offering almost 24-hour access. Meanwhile, a 2025 decision by the Commodity Futures Trading Commission (CFTC) to drop its appeal against prediction market Kalshi’s political contracts signals a retreat by the regulator.

Against that backdrop, retail investors are asking whether forecast contracts amount to added tools for their portfolio or little more than yet another way to gamble legally.

How Forecast Contracts Work

Forecast contracts act like financial betting slips for real-world events. Each contract asks a simple yes-or-no question—”Will inflation hit 4% by year-end?” or “Will it rain in Miami on Super Bowl Sunday?”—and creates two tradable contracts around that outcome. Instead of fixed odds, these contracts trade like mini-stocks. If traders think there’s a 38% chance of rain, the “Yes” contract might cost 38¢. Buy it for that price, and you’ll pocket 62¢ if it does rain (a 63% return on your investment). If the skies stay clear, you lose your 38¢ stake.

Because these contracts are exchange-traded, positions can be closed early by selling to another participant, allowing hedgers or speculators to lock in gains (or cut losses) before the forecast’s ultimate resolution. That is, you don’t have to wait for the weather forecast to cash out. Because these contracts trade on exchanges, you can sell your position anytime before the event occurs. Maybe new weather data bumps rain chances to 55%—suddenly your 38¢ contract is worth 55¢, letting you lock in a quick 45% gain.

Many venues, including IBKR’s ForecastEx, Polymarket, and Kalshi, offer small-dollar caps—as low as $20 to $25 per contract—to keep losses manageable for retail clients, a design choice explicitly highlighted in recent CFTC filings.

For now, regulators classify forecast contracts like traditional derivatives, subjecting them to anti-manipulation and position-limit rules.

The Regulatory Tide Is Turning—But Still Choppy

For years, U.S. regulators treated broad-use political or economic event contracts with suspicion, equating them with the likes of offtrack betting. That posture, however, shifted in September 2023, when a federal judge ruled the CFTC had overstepped by denying popular prediction market Kalshi’s application to list political forecast contracts. The agency appealed, but then changed course in May 2025, voting unanimously to dismiss the case. Observers note that, while the move does not create a blanket safe harbor, it removes a major hurdle clouding new listings.

Interactive Brokers, among others, pounced quickly, integrating almost 250 markets ranging from next-quarter GDP to hurricane landfalls, anticipating the category could even eclipse equity trading volumes within fifteen years.

Still, Congress has floated bills to ban election wagering altogether, and individual states retain authority to block access—reminders that legal certainty remains a work-in-progress.

Are Forecast Contracts Merely a Gamble?

Forecast contracts sit at the intersection of hedging and speculation: A farmer might buy “Yes” on “CPI above 4% in Q4” to offset inflationary input costs, while a bond desk could short “Yes” (or buy “No”) on a “Fed hike in December” as a cheap alternative to Eurodollar options.

Academic studies show that crowd forecasts tend to outperform expert surveys, yet this edge narrows once transaction fees, taxes, and bid-ask spreads are factored in. If spreads are 3¢ to 5¢, it would eat almost 10% of the expected value when prices hover near 50¢. Liquidity is also uneven: high-profile elections trade deep, but esoteric climate metrics may stay inactive for days, making exits more costly.

Finally, the binary structure invites cognitive traps: overemphasizing compelling narratives, chasing losses, or mistaking percentage odds for coin flips. Regulators explicitly warn that, although dollar losses are capped, concentration risks can snowball if traders pyramid dozens of correlated positions.

The Bottom Line

Forecast contracts can be a nimble way to express views on nonfinancial outcomes, hedge idiosyncratic risks, or simply test one’s probabilistic mettle, without tying up large amounts of capital. Yet they are not a free lunch. Too few traders for specific contracts, wide spreads, shifting regulations, and behavioral biases all can erode their appeal, turning what looks like a precision tool into a potential high-stakes gamble.