Prediction Markets Are Growing Across the United States. Here Are 3 Companies Tapping Into Their Popularity.

Prediction markets are a fascinating development, since they allow a person to, basically, put their money where their mouth is. With money on the line, predictions are expected to be more reliable. That makes these markets a very attractive tool for assessing outcomes.

DraftKings (NASDAQ: DKNG), Flutter Entertainment (NYSE: FLUT), and Robinhood Markets (NASDAQ: HOOD) are all hoping to get in early on the prediction markets opportunity. Should you join in and buy one of these stocks?

What are these companies doing?

DraftKings offers prediction markets trading in all but three U.S. states. In the 47 other states, it offers sports markets, financial markets, or both.

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Flutter Entertainment offers prediction markets through its FanDuel site. FanDuel offers prediction markets in all 50 states, with some states only offering finance, economics, and commodities prediction markets, and others adding sports predictions to the mix.

Robinhood Markets offers prediction markets in sports, finance, social events, and economics. It states that "Some contracts may not be available in every state or territory." Robinhood also states in its FAQ section on prediction markets that "Robinhood event contracts allow for speculation in prediction markets -- these are not bets."

However, there's no fundamental value to any prediction, so for most investors prediction markets will probably look a lot like a bet. This is the issue that long-term investors need to keep in mind when considering the value of prediction markets to companies (like Robinhood, DraftKings, and Flutter) that offer them.

AMC data by YCharts.

Getting in early, or taking on too much risk?

Humans enjoy betting and have a tendency to get emotional. Investment bubbles are an example of this on Wall Street, with meme stocks the most recent headline-grabbing event. If you look at a meme stock like AMC Entertainment (NYSE: AMC), you can see both the good and the bad sides of the equation.

Robinhood, DraftKings, and Flutter Entertainment are all jumping on what could turn out to be a short-term fad. A recession or a bear market could quickly turn hot prediction markets very cold. These companies are giving customers what they want, which is probably the right decision.

However, that doesn't mean that what customers want will turn into a huge, long-term opportunity for shareholders. Most investors should probably wait until prediction markets have been tested by tough economic times before deciding that this hot trend is the big reason to buy any stock.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Flutter Entertainment Plc. The Motley Fool has a disclosure policy.