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Prediction market basicsBeginner

What Are Prediction Markets? A Beginner's Guide

Prediction markets let people buy and sell contracts tied to whether a future event happens. Because a winning contract pays a fixed amount, its price can be read as the market’s current estimate of how likely the event is. This guide covers how that works, how markets are settled and where the numbers can mislead you.

By MarketAtlas EditorialPublished 4 min read

Key takeaways

  • A prediction market lists contracts on a clearly worded question, such as whether an event will happen by a set date.
  • A Yes contract pays a fixed amount if the event happens and nothing if it does not. A No contract is the reverse.
  • Because the payout is fixed, the price works as a rough, market-implied probability.
  • Every market has written resolution rules. Read them before trading; they decide who gets paid.
  • Prices reflect what traders are willing to pay right now, not a guaranteed forecast. Fees, spreads and thin trading all affect them.

What a prediction market is

A prediction market is a marketplace where people trade contracts tied to the outcome of a future event. The question is written so it can be settled clearly: Will the central bank cut rates at its next meeting? or Will this film earn more than a certain amount in its opening weekend?

People who think the answer is yes buy contracts that pay out if it is yes. People who disagree take the other side. The price at which they agree to trade moves as new information arrives.

How prediction markets work

Most modern platforms work like an exchange. Traders post the prices they are willing to buy or sell at, and a trade happens when two orders meet. The platform runs the order book, holds funds and settles the contracts. Rather than betting against its customers, it typically earns money from trading fees; Kalshi, for example, says it makes money by charging a transaction fee.

  1. A platform lists a market with a specific question, an end date and written resolution rules.
  2. Traders buy and sell contracts at prices between $0 and $1 (often shown as 0 to 100 cents).
  3. The price changes as people react to news, data and each other.
  4. When the outcome is known, the market resolves and winning contracts pay out.

Event contracts

The thing you trade is an event contract. In its simplest form, a contract pays a fixed amount if a stated outcome happens, and nothing if it does not. On Polymarket, for example, each share in the correct outcome pays $1.00 (in the USDC stablecoin) when the market resolves.

Because the maximum payout is fixed, the price tells you something. If a contract costs $0.30, traders as a group are paying 30 cents for a chance at $1. That is why prices are often read as probabilities. Our guide to prediction market odds and probabilities explains how to read them in detail.

A worked example

Imagine an illustrative market: Will it snow in the city centre on New Year’s Day? Yes trades at $0.20.

  • If you buy one Yes contract for $0.20 and it snows, you receive $1.00, a gain of $0.80 before fees.
  • If it does not snow, the contract expires worthless and you lose the $0.20.
  • If a forecast changes before the day and Yes rises to $0.45, you may be able to sell early, provided someone is willing to buy.

The numbers are made up for illustration; real markets add fees and a gap between buying and selling prices.

Yes and No outcomes

Most markets are binary: an outcome either happens or it does not.

  • A Yes contract pays out if the event happens.
  • A No contract pays out if it does not.

Ignoring fees and spreads, the Yes and No prices on the same question add up to roughly $1. If Yes trades at $0.62, No will trade near $0.38.

Some events have several possible outcomes, such as which candidate wins a primary. Platforms usually present these as a group of separate Yes/No markets, one for each candidate.

How markets resolve

Every market has resolution rules. They state exactly what counts as Yes, which source will be used to decide it, and what happens in edge cases such as a delayed announcement or an ambiguous result.

Once the outcome is confirmed under those rules, winning contracts are paid and losing contracts expire worthless.

Benefits and limitations

Prediction markets have real strengths:

  • They combine many views. A price pulls together many traders’ information and judgement. Academic research has found that market-generated forecasts are typically fairly accurate across a range of settings (Wolfers and Zitzewitz, 2004).
  • They update quickly. Prices can move within minutes of new information.
  • They are easy to read. A price near $0.80 is quicker to interpret than a long forecast report.

They also have clear limitations:

  • Thin markets can mislead. When few people trade, a single order can move the price a long way.
  • Prices are not facts. Even in a well-calibrated market, events priced at 70% should still fail to happen about three times in ten.
  • Fees and spreads matter. The price you can actually trade at is rarely the headline number.
  • You can lose your stake. A contract on the losing side is worth nothing at resolution.
  • Access varies. Which platforms you can use, and how they are regulated, depends on where you live.

Where to go next

Frequently asked questions

Is a prediction market the same as betting?

They share some features, but the structure differs. On an exchange-style prediction market you trade with other participants at prices they set, rather than against a bookmaker that sets the odds, and you can often sell before the event resolves. How each is regulated depends on the platform and where you live.

Do I have to hold a contract until the event happens?

Often not. Polymarket’s documentation, for example, says shares can be sold before the outcome is known. Whether you can sell at a fair price depends on whether another trader is willing to buy, which is a question of liquidity.

Who decides how a market resolves?

Each platform publishes resolution rules for every market, including the source it will use to decide the outcome. Read those rules on the market page before trading.

Sources

  1. What is Polymarket (opens in a new tab)

    Polymarket Docs · Documentation · Accessed

  2. Fees (opens in a new tab)

    Kalshi Help Center · Company · Accessed

  3. Prediction Markets (Journal of Economic Perspectives, 18(2), 107–126) (opens in a new tab)

    American Economic Association — Wolfers & Zitzewitz, 2004 · Primary data · Accessed

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