How do prediction markets work?

They list contracts on real outcomes. Each contract pays $1 if it settles yes and $0 if it does not, so its price in cents reads as the market's probability. Traders buy and sell through an order book, pay a fee, and the contract settles on a named source.

How do you make money on a prediction market?

A contract makes money if it settles yes for more than you paid, including fees. Over many positions, that only happens if your estimates are better than the prices. You can lose all of what you pay on any contract.

What decides whether a contract pays?

Its settlement rules: a named source, such as the official result or an agency's published number, and the exact wording, such as whether the strike value itself counts.

Are prediction market prices accurate?

They tend to be more reliable in busy markets with clear settlement, and less reliable in thin markets, very cheap contracts and long-dated contracts, where fees, spreads and tied-up money pull prices away from probabilities.

How Prediction Markets Work: Prices, Contracts, Fees & Settlement

1. A contract pays $1 or nothing

Every contract is a yes-or-no question with a named source and a date: will the home team win, will core CPI come in at 0.3% or higher, will the Fed hold. If the answer is yes, each contract pays $1. If not, it pays $0. Every contract has a yes side and a no side, and exactly one of them pays.

2. The price is a probability

Because the payout is $1, a price in cents reads as a rough probability. A contract at 62¢ says the market puts the outcome near 62%, and the no side trades near 38¢. When several outcomes are listed, such as every team's title chance, their prices usually add up to a little over 100¢. That extra is the field's markup. The implied probability calculator adds it up and strips it out.

3. Orders meet in a book

Buyers post bids and sellers post asks. The best bid and best ask make the spread, and the middle of them is the usual one-number price. Buy now and you pay the ask; sell now and you get the bid. A big order can run past the contracts available at the best price and fill partly at worse ones.

4. Fees raise your break-even

Many exchanges charge a fee that scales with rate × P × (1 − P). At a 7% rate, 100 contracts at 30¢ cost about $1.47 in fees, so your all-in cost is 31.47¢ a contract and you need the contract to settle yes about 31.5% of the time just to break even. The fee calculator works it out for any order.

5. Combos multiply

A combo, called a parlay at a sportsbook, pays $1 only if every leg settles yes. Its reference price is the legs multiplied: three legs at 62¢, 58¢ and 70¢ come to about 25.2¢. A quote of 29¢ carries about a 15% markup. Check any quote with the combo price calculator.

6. Hedging limits the loss

Buying the opposite side of a position narrows the range of outcomes. Hold equal numbers of yes and no and the result is the same either way, a profit only if the two prices add up to less than 100¢. Hedge less than that and you trade some upside for a smaller loss. The hedge calculator shows both outcomes for any size.

7. Settlement decides everything

Each contract names its source and its exact wording. "Above 0.3%" and "0.3% or higher" are different contracts. A game contract has rules for overtime and postponement. A data contract usually settles on the first published number, even if it's revised later. Read the settlement rules checklist before you trade.

8. What can go wrong

You can lose 100% of what you pay on any contract. Losing streaks are normal even when your estimates are good, and related positions can all lose together. Expected value only helps if your probability is right; the expected value calculator shows how far it has to be from the price to matter.