How prediction markets work
Published May 17, 2026 · Last updated: September 29, 2026
TL;DR
- Prediction markets are exchanges where traders buy and sell YES/NO contracts on real-world events.
- A YES share pays $1 if the event happens, $0 if it doesn't. The current price (e.g. 0.32) is the market's implied probability (32%).
- The two venues that matter: Kalshi and Polymarket, both CFTC-regulated in the US.
New to this? Read this first
Prediction markets price events in cents, not odds. Here is the vocabulary used on this page, in plain English.
- Price = probability
- A contract that pays $1 trading at 12¢ means the market thinks there's a 12% chance.
- YES / NO share
- YES pays $1 if it happens. NO pays $1 if it doesn't. You can never lose more than you paid.
- Implied chance
- Just the price read as a percentage. A contract at 14¢ implies a 14% chance.
- Vig
- A built-in margin some venues charge. On prediction markets you pay the spread and fees instead.
- Liquidity
- How much money is in the market. More money means you can get in and out at the price you see.
A prediction market is a stock market for things that haven't happened yet. That's the whole pitch — the rest is mechanics.
What a prediction market actually is
A prediction market is an exchange where two traders agree on a price for a contract that pays $1 if a specific real-world event happens and $0 if it doesn't. The price they agree on — say, 32¢ — is the market's collective answer to the question "what's the probability this happens?"
That's it. The rest is plumbing: how the order book matches buyers and sellers, how the resolution source is verified, how the platform stays legal. The core idea is small.
How prices encode probability
Imagine a contract on "Harvard's acceptance rate falls below 3% this cycle." A YES share pays $1 if true, $0 if false. If you and I agree on 32¢, we're both saying we think the odds are roughly 32%. If new information makes the event more likely, the price moves up; if less likely, down.
Across thousands of trades, this price tends to be more accurate than expert forecasts — because traders with edge keep adjusting it, and the ones who are wrong lose money and trade smaller next time.
Who's trading, and why
Three rough groups: hedgers protecting against an outcome they care about, informed traders with a view sharper than the market, and liquidity providers who just want to earn the spread. Each one improves the market: hedgers add volume, informed traders correct prices, liquidity providers tighten the spread.
How a market settles
At expiration, the platform reads the resolution source. If the answer is YES, all YES shares pay $1 and all NO shares pay $0. Money moves automatically. On Kalshi, this is handled by a CFTC-regulated team; on Polymarket, by the UMA oracle network with a dispute window. Settlement on liquid markets is usually instant; disputed markets can take days.
Where to trade
Two venues cover almost everything:
- Kalshi — CFTC-regulated, legal in most US states, USD deposits. Open a Kalshi account (opens in a new tab).
- Polymarket — deeper market selection; CFTC-regulated US app that trades in dollars. Open a Polymarket account (opens in a new tab).
That's the whole stack: a contract, a price, a resolution, a venue. Everything else — liquidity, fees, oracles, dispute windows — is the friction between those four things and a smooth experience.
Price → probability → payout
Contract price in cents (e.g. 14)Amount you put in ($)- Implied chance
- 14.0%
- Contracts
- 143
- Pays back
- $142.86
- Profit if right
- $122.86
A contract settles at $1 if the event happens and $0 if it doesn't, so the price is the market's probability. Every contract you buy at this price pays $1 — the cheaper the price, the less likely the market thinks it is.
Your first trade, step by step
- Fund a small balanceOpen an account, verify your ID, and deposit $10–$20 by debit or ACH. You must be 18+ and in an eligible state.
- Find the marketSearch the event by team, player or headline. Check the price and the volume — thin markets move a lot on small orders.
- Read the price as a probabilityA 23¢ YES contract means the market gives it about a 23% chance. If you think it is higher than that, YES is the value side.
- Place a limit orderEnter the price you want rather than taking the market. You buy shares, not a bet slip — the most you can lose is what you paid.
- Decide your exitYou can sell any time before the event resolves, or hold to settlement where each winning share pays $1.
Ready to try it: open Polymarket (opens in a new tab). 18+, eligible states only. Trade what you can afford to lose.
Sources & further reading
Related reading
Prediction Markets Explained: How They Work in 2026A plain-English guide to prediction markets: how they work, how prices map to probabilities, why they're accurate, an…Read → Event contracts explained: what they are and how they workAn event contract is a CFTC-regulated derivative paying $1 if an event happens and $0 if not. The legal definition, h…Read → Prediction market arbitrage: how it really worksArbitrage in prediction markets — across venues, across related contracts, and across no-vig pricing. What works in 2…Read → Kalshi vs Polymarket: which should you use? (2026)A direct comparison of Kalshi and Polymarket across legality, fees, market selection, and payout speed. Includes a re…Read →
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Frequently asked questions
Is a prediction market the same as gambling?
Economically it shares characteristics with betting, but legally Kalshi operates as a CFTC-regulated derivatives exchange. Its contracts are event derivatives, not wagers.
How is the price a probability?
Because each share pays exactly $1 on YES and $0 on NO, the fair price equals the probability of YES. If the market thinks an event is 32% likely, YES should trade near 0.32.
Who decides if YES or NO wins?
Each market lists a resolution source — a press release, official ruling, or specified URL. An oracle reads it and settles. On Kalshi the oracle is Kalshi; on Polymarket it's the UMA network.
Can I lose more than I put in?
No. Maximum loss on any contract is what you paid (max $1 per share). There's no margin, no leverage.
Where should a beginner start?
If you're in the US and want real money, Kalshi. If you want maximum market selection and are outside the US, Polymarket.
What does the price actually mean?
A contract settles at $1 if the event happens and $0 if it doesn't, so the price is the market's probability. A contract at 23¢ means roughly a 23% chance, and $1 buys about 4.3 shares.
How much money do I need to start?
You can place a real trade with $10–$20. Contracts are priced in cents, so a $20 balance buys dozens of shares on a cheap market. Start small until you have seen a position settle.
21+ · T&Cs apply · Terms
Certain limitations apply. The offer is available to new users only, subject to the terms and conditions at kalshi.com/tc/500. 18+ only. Restrictions and eligibility requirements apply. Event contract trading involves significant risk and is not appropriate for everyone. Please carefully consider if it is appropriate for you in light of your personal financial circumstances. Kalshi products are not available in all jurisdictions. See kalshi.com/regulatory for more information.
