What is a prediction market and how does it work

A prediction market is an exchange where people trade contracts on whether a future event will happen. Each contract pays 100 if the event happens and 0 if it does not, so the price at which it trades, say YES at 34%, is the market's running estimate of the odds.

That is the whole idea. Everything else, the order books, the wallets, the fee schedules, the arguments about legality, is plumbing. This guide covers the idea; the plumbing is in How Kalshi works and How Polymarket works.

A price that reads as a probability

The contract is a yes/no question with a deadline and a rule for deciding the answer. "Will the Federal Reserve cut rates at its October meeting?" pays 100 to YES holders if the Fed cuts and 100 to NO holders if it does not. How yes/no contracts work walks through the payout arithmetic.

Because the winning side always gets 100, a trader who pays 34 for YES is saying the event is worth at least 34% to them, and the trader who sold it is saying it is worth no more than 34%. The last price at which the two agreed is the number we print as the probability. When the Fed decision market moves from 34% to 41% in an afternoon, that is the market repricing the odds by +7 points in response to whatever crossed the wire.

The reading has limits. A price is the point where buyers and sellers ran out of disagreement, not a survey of everyone's beliefs, and on a thin market it can be moved by a single order. Price versus probability covers when to trust it and when not to.

Who is on the other side

Nobody sets the price and nobody is the house. Every YES contract exists because someone bought it and someone else sold it at the same price. The exchange matches the two, holds the money, and pays whichever side the rule text declares the winner. It does not care who wins.

That is the difference from a sportsbook. A bookmaker prices both sides so that the implied probabilities add up to more than 100% and keeps the excess. On an exchange, YES and NO add up to about 100% by construction, and the venue earns its money from a trading fee or, on some markets, nothing at all. The costs that remain are the spread between the best bid and best ask and any fee, covered in Payout versus profit.

The two venues

Two exchanges account for nearly all of the volume worth reporting.

Kalshi is a designated contract market regulated by the CFTC. Accounts are in US dollars, contracts are priced from 1 to 99 cents and pay a dollar, and the venue charges a trading fee that peaks on contracts near 50%; the current schedule is in Kalshi fees explained and on Kalshi's own fee page.

Polymarket runs an order book on the Polygon blockchain, with positions held in the stablecoin USDC. The global site is not open to US persons; a separate, US-regulated Polymarket app launched after the company bought a CFTC-licensed exchange in 2025. As of September 2026 the two run under different rulebooks, and a reader should confirm which one they are looking at.

The same headline question often trades on both, at prices that differ by a point or three, and sometimes the contracts turn out not to be the same contract at all. Polymarket versus Kalshi covers the differences; Are prediction markets legal in your state covers who is allowed to trade.

What they are used for

News. A market price is a live summary of what informed money expects. The 2028 presidential market tells you in one number how a fundraising quarter or a debate landed, and it updates at 2 a.m. when the polls do not.

Forecasting. Economists, campaign staff, and newsrooms read these prices as forecasts because a price that is wrong is an open invitation for someone to profit by correcting it. That mechanism works best where many people are paying attention; the markets that go wrong tend to be the thin ones nobody was watching.

Hedging. A business exposed to a Fed cut, a hurricane, or a shutdown can buy the side that pays if the bad thing happens. This is the use the CFTC framework was written for, and it is why the government shutdown market has traders who are not there for the sport of it.

A worked example

Take the Super Bowl market with one team's YES at 20%. A trader who thinks the team's real chance is 30% buys 100 contracts.

Item	Amount
Cost of 100 YES at 20%	$20.00
Payout if the team wins	$100.00
Profit if the team wins	$80.00
Loss if the team loses	$20.00
Expected value at the market's 20%	0.20 × $100 - $20 = $0.00
Expected value at the trader's 30%	0.30 × $100 - $20 = $10.00

At the market's own price the expected profit is zero, before fees. That is what it means for the price to be the probability: at 20%, the contract is fairly priced for someone who believes 20%. The trade only has value if the trader's estimate is better than the market's, and the fee and the spread come off the top of that $10. Ten expected dollars on a $20 stake is a real edge if the 30% view is right, and a $20 loss seven times out of ten if it is.

What a prediction market is not

It is not a poll. Nobody is asked what they think; they are asked what they will risk, which is a different and usually more honest question.

It is not a bet with the house. There is no bookmaker margin in a single price, and no counterparty who benefits from you losing.

It is not the headline. The contract settles on a rule that names a source, a date, and a threshold, and two contracts with the same title can settle in opposite directions. How settlement works covers why the rule text is the contract.

It is not a certainty. A 95% contract loses one time in twenty, and it does so on the day the crowd was most sure.

What to check before you trade

• Which venue you are on, and whether you are allowed to be on it.
• The rule text: what source settles it, on what date, and what counts.
• The bid and the ask, not the displayed price, because the gap is your cost.
• The fee at that price, largest near 50%.
• Whether the same question trades elsewhere at a different price, and why.

Nothing on this page is investment advice, and the venue's current rule text and fee page are the only things that pay.