How prediction markets work

Published 2026-05-17 · Last reviewed 2026-08-06

Catie Di StefanoFounder & Editor-in-Chief

Reviewed by Catie Di Stefano

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 (CFTC-regulated, US-legal) and Polymarket (on-chain, global).

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.
+609 (American odds): Sportsbook shorthand. Bet $100, win $609 profit. That's about a 14% implied chance.
Vig: The book's built-in margin. Sportsbook percentages add up to more than 100%; market prices don't.
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.
Polymarket — on-chain, deeper market selection, USDC. Geo-blocked in the US. Open a Polymarket account.

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.

Odds → probability → payout

Sportsbook odds (e.g. +609 or -150)Your stake ($)

Implied chance: 14.1%
Fair market price: 14¢
Pays back: $141.80
Profit if right: $121.80

Sportsbook odds include the book's margin, so the implied chance shown here is slightly higher than the true probability. A prediction-market contract priced below this number is the better deal. Reverse check: 14.1% ≈ +609.

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. 18+, eligible states only. Trade what you can afford to lose.

Sources & further reading

The Promise of Prediction Markets (Arrow, Forsythe, Gorham, et al., Science, 2008)Science / AAAS
Prediction Markets (Wolfers & Zitzewitz, Journal of Economic Perspectives, 2004)American Economic Association

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.