A prediction market is a collection of people speculating on future events or outcomes. These events include (but are not limited to) elections, sales of a company, price fluctuations of commodities, even changes in the weather and just about any event or outcome that can be objectively verified ex post.
Prediction markets are effectively event derivatives, where the value of the derivative reflects the probability of an outcome occurring.
Legality in the United States
In the United States regulation of derivatives falls under the CFTC (Commodity Futures Trading Commission). Because of the broad bans on illegal gambling and CFTC regulation of derivatives, prediction markets in the United States have been limited to "play money". The CFTC did provide the Iowa Electronic Markets (a prediction market run by the University of Iowa that focuses on political and elections markets for academic purposes) a no-action letter, allowing users to use trade real-money contracts on the site.
The CFTC has previously sued Ireland-based prediction market operator InTrade. InTrade was ordered to pay a $3million fine.