Prediction markets in Canada explained

What if you could trade on future headlines — whether inflation will rise, interest rates will fall or a stock index will hit a certain level?

That’s the basic idea behind prediction markets: you buy and sell contracts tied to future events, and receive a payout if your prediction turns out to be right.

It sounds simple — maybe even smart. But prediction markets are speculation, not a form of investing.

As they begin attracting attention in Canada, investors should understand how they work, what’s allowed and where risks show up. Because when your money is involved, “I think this will happen” is very different from “this helps me build wealth.”

Prediction markets let people trade on the outcome of future real-world events. Traders buy and sell contracts tied to a simple question: Will this event happen? Contract prices fluctuate based on expectations of the result.

Currently, prediction markets in Canada are limited to certain types of events — economic forecasts, environmental forecasts and financial indicators (more details are provided later in the article). If your prediction is correct, the contract pays out. If you’re wrong, it may expire and be worth nothing.

In other words, you’re not investing in an asset with underlying value, like GICs and mutual funds. You’re guessing whether something will happen — and guesses aren't always right.

Most prediction market contracts start with a question that has a clear, yes-or-no outcome. For example, will inflation hit above 3% by the end of the year? Or, will the S&P/TSX Composite Index close above a certain level by a specific date?

From there, the process looks something like this:

An event contract is created around a specific question with a clearly defined outcome.
From there, in most cases, traders choose between a “Yes” or “No” position based on what they think will happen. 

The event contract is listed on a prediction market platform, where buyers and sellers can engage in financial exchanges with one another. The platform acts as the marketplace, facilitating trades rather than taking a position on the outcome.

Traders can buy and sell contracts through the platform. As public opinion changes and new information becomes available, contract prices move based on supply and demand.

For example, if more traders believe inflation will be above a certain level by year-end, demand for “Yes” contracts increases, pushing their price higher, while “No” contracts become cheaper (see Figure 1).

Traders can sell their contracts before the event is resolved, allowing them to lock in a profit — or cut their losses — without waiting for the final outcome to be known at settlement.

As people buy and sell contracts, prices change. For example, if a “Yes” contract trades for $0.70, it’s often interpreted as the market assigning roughly a 70% chance that the event will happen.

However, contract prices are based on what participants collectively believe. They're not a guarantee of what will happen.

Once the outcome is known, trading stops and contracts are settled.

If you hold winning contracts, they pay a fixed amount. Often, that's $1 per contract.

But if you hold losing contracts until settlement, they expire worthless, meaning you lose the amount you paid for them.

Any applicable transaction fees may also affect your final return or loss.

Figure 1: Prediction market example

Yes, but with important guardrails to ensure market integrity.

Unlike in some other countries, Canadians can’t trade prediction markets on just any event. The Canadian Securities Administrators (CSA) and the Canadian Investment Regulatory Organization (CIRO) have established rules and strict regulatory requirements to limit which event contracts can be offered and who can offer them, intended for Canadians’ protection.

If you’re hoping to trade contracts on the next federal election or Stanley Cup winner, you’re out of luck. In Canada, prediction market trading is currently limited to events that fall into three broad categories:¹

There’s another important rule: When created, contracts must have a maturity date at least 30 days in the future. 

Prediction markets in Canada can’t be based on:¹

• ×             Election results, including federal, provincial and municipal elections.
• ×             Political events, such as party leadership races, geopolitics or referendums.
• ×             Unlawful activities under Canadian law.

People also can’t trade event contracts using borrowed money, which is often called trading on margin. Every trade must be made using their own money, not borrowed funds. 

Like gambling, prediction markets involve risking money on an uncertain outcome. If your prediction is right, you can make money. If you're wrong, you can lose some — or all — of your money.

Whether you think of it as gambling, speculation, or something in between, one thing doesn’t change: you’re risking real money on an uncertain outcome, and there’s a very real possibility of losing the entire value of your trade.

Prediction markets and investing both involve committing funds in hopes of earning a return. But that’s where the similarities largely end. One is designed to answer a short-term question; the other, a vehicle to help build long-term wealth.

The biggest difference is what you’re buying. When you invest, you’re buying an asset that can generate value over time. On the other hand, a prediction market contract is tied to the outcome of a single event. Once that event happens, it’s a win-lose scenario that results in either a payout or a loss and it ends there.

Because prediction markets may eventually appear on fintech platforms or through financial institutions, people may assume it’s just another type of investment. Understanding this important distinction can help you decide how — or whether — they fit into your long-term investment plan. Ultimately, funds set aside for retirement, a child’s education, or other long-term goals deserve care and should be invested in alignment with an investor’s time horizon, investment objectives, and risk tolerance.

Prediction markets are built around short-term events. There’s always another headline, another prediction, and another opportunity to trade.

That can make it tempting to focus on what’s happening today instead of the goals you’re saving for tomorrow.

Some risks to keep in mind include:

• A wrong prediction can result in a total loss. If your prediction is wrong and you hold the contract until settlement, it can expire worthless.
• It may be harder to sell than you expect. If there aren’t many buyers, you may not be able to exit your trade at the price you want.
• Contract prices can be misleading. While contract prices can provide insight into what traders expect to happen, they reflect market sentiment rather than actual probability. Even widely held expectations can turn out to be wrong.
• Emotions can take over. It’s easy to get caught up in headlines, follow the herd or chase the next hot opportunity.

The biggest risk isn’t necessarily losing a few dollars here and there. It’s that constantly chasing short-term wins can distract you from the bigger picture.

The more time and attention you spend trying to predict the next event, the less you may spend on habits that help build your financial future — staying invested, staying diversified and sticking to a plan.

Before you place a trade, it’s worth asking yourself a few questions.

Is this part of my financial plan or am I reacting to a headline or recent market buzz? If your goal is long-term wealth creation, consider whether a short-term event contract will actually get you there.

If you hold a contract until settlement and your prediction is wrong, it can expire worthless. Only trade with money you can afford to lose.

Before buying a contract, make sure you understand what event it’s tied to, how the outcome will be determined and when the contract settles. A small detail in the wording can make a big difference.

Your money may be tied up until the maturity date of the contract unless you choose to, and are able to, sell it earlier.

Prediction market trades can be an interesting way to express a view on what might happen next. But they aren’t a substitute for a risk appropriate, diversified investment strategy designed to help you reach long-term financial goals, like retirement or buying a home. 

While prediction markets are built around guessing what might happen next, successful investing focuses on preparing for whatever happens next.

The reality is that long-term wealth creation shouldn’t depend on making a series of correct predictions. It depends on having a plan and an investment strategy that supports growth over the long term.

Rather than relying on the outcome of a one-off event, diversified portfolios spread your investments across different asset classes, markets and investment styles. Diversified solutions — like Scotia Essentials Portfolios — help Canadian investors stay invested through changing markets while keeping their long-term goals in focus.

Prediction markets may be coming to Canada, but the fundamentals of long-term investing haven’t changed: investors still need a clear plan, a diversified portfolio aligned to their goals, and the discipline to stay focused through uncertainty.

That’s where financial advice can make a difference. An advisor can help investors look beyond short-term trends and the latest headline, avoid distractions, and keep the focus where it belongs: on their goals, time horizon, and long-term financial future.

Short-term speculation should not compete with goals years in the making. Your long-term goals deserve a higher probability of success than a simple yes-or-no trade.

No. Under current Canadian rules, prediction markets are limited to certain economic indicators, environmental forecasts and financial events. Event contracts based on sports, elections and other political events aren’t permitted.

That doesn’t mean sports betting is illegal. Canadians can legally place sports bets through provincially regulated sportsbooks and licensed betting platforms. But sports betting is regulated differently from prediction markets.

Prediction markets can offer a snapshot of what participants collectively believe is likely to happen. But they aren’t crystal balls. Prices can be affected by new information, low trading activity, incomplete information and trader behaviour — and the market’s prediction may turn out to be wrong.

Yes. Prediction market trading can involve several types of fees and charges, including but not limited to settlement fees. Although these costs may seem small on individual trades, frequent buying and selling can make fees add up over time and reduce overall returns. 

Yes. If you hold an event contract until settlement and your prediction is wrong, it can expire with no value. That means you could lose the full amount you paid for the contract.