# How prediction markets work

> A prediction market is an exchange where you buy and sell contracts on the outcome of a future event. Each contract pays $1 if the event happens and nothing if it doesn't, so its price — say 38¢ — works as the market's estimate of the probability. You trade with other people, not the house, and you can sell before the event is decided.

- URL: https://safebet.ai/us/prediction-markets/how-prediction-markets-work/
- Markdown version: https://safebet.ai/us/prediction-markets/how-prediction-markets-work/index.html.md
- Last updated: 2026-09-30 (re-checked when an operator changes its terms or a regulator or court acts)
- Author: SafeBet.ai Research Team (SafeBet.ai)
- Editorial policy and advertiser disclosure: https://safebet.ai/editorial-policy/

## Key takeaways

- Event contracts are yes/no questions that settle at $1 or $0, so a price of 38¢ implies roughly a 38% chance.
- Prices are set by other traders on an order book; the platform charges a fee instead of taking the other side.
- You can sell your position before the event ends, locking in a profit or cutting a loss — if someone will buy it.
- Every contract names its resolution source, such as official data or the final score; read the rules before you trade.
- Research shows markets are often accurate but not infallible, and most short-term traders lose money.

## What is a prediction market?

A prediction market is an exchange where people buy and sell contracts on the outcome of future events: whether a team wins, whether the Federal Reserve cuts rates, how high the temperature gets in Chicago tomorrow. The Commodity Futures Trading Commission (CFTC), which regulates them in the US, describes these **event contracts** as derivatives with a fixed payout — usually $1 — and an expiration date, whose price "reflects the market's expectation of the outcome."

In the US you trade them on CFTC-regulated platforms such as Kalshi, Polymarket US and Crypto.com's OG, or through brokers such as Robinhood and Interactive Brokers. Our [ranking of the best prediction markets in the US](https://safebet.ai/us/prediction-markets/) compares them.

## How an event contract works

Most contracts are yes/no questions:

- The side that turns out to be right settles at **$1.00** per contract.
- The side that turns out to be wrong settles at **$0**.
- Before that, contracts trade anywhere between **1¢ and 99¢**.

That makes the price easy to read: a contract at 38¢ means traders put the chance at roughly **38%**. "Yes" and "No" are mirror images — if Yes trades at 38¢, No trades around 62¢ — and buying Yes is economically the same as selling No. To translate prices into sportsbook-style odds, see our guide to [reading prediction market prices as odds](https://safebet.ai/us/prediction-markets/prediction-market-odds/).

## A trade, step by step

Say a market asks "Will the Fed cut rates in December?" and Yes trades at 38¢. You think the chance is higher, so you buy 50 Yes contracts on Kalshi:

1. **You pay** 50 × 38¢ = $19.00, plus a taker fee of $0.83 — **$19.83** in total.
2. **If the Fed cuts,** each contract pays $1: you receive $50.00, a profit of **$30.17**.
3. **If it doesn't,** the contracts expire worthless and you lose **$19.83**.
4. **Or you sell early.** If good economic news pushes Yes up to 55¢ before the meeting, you can sell your 50 contracts for $27.50 minus a $0.87 fee — $26.63, locking in a **$6.80** profit whatever the Fed decides.

That fourth option is what makes a prediction market a market: your position has a price every moment until settlement. Our [fees guide](https://safebet.ai/us/prediction-markets/prediction-market-fees/) shows how each platform's fees change these numbers.

## Order books: how prices are set

Each contract has an **order book**: a live list of offers to buy (bids) and offers to sell (asks), each with a price and a quantity. A trade happens when a buyer's price meets a seller's.

- **Market orders** (Kalshi calls them "quick orders") fill immediately at the best available prices. A big order can "walk the book": buying 1,000 contracts when there are 500 on offer at 10¢ and 500 at 12¢ gets you an average price of 11¢.
- **Limit orders** let you name your price. They only fill if someone accepts it; until then they wait in the book.
- **Makers and takers.** If your limit order waits in the book, you're a *maker*; if you fill an existing order, you're a *taker*. Platforms usually charge makers less — Kalshi charges most makers nothing, and Polymarket US pays them a small rebate.
- **The spread** — the gap between the best bid and the best ask — is a cost on top of fees. In busy markets it's a cent or two; in quiet ones it can be much wider.

## Who is on the other side of your trade?

Other traders, not the house. Polymarket US says the exchange "does not take the other side" of trades and does not set prices, and Kalshi says you are always trading against another member — often a professional market maker.

That's worth taking seriously. Kiplinger has warned that retail traders face "very sophisticated institutional organizations," a 2026 study found that the top 1% of wallets accounted for about 74% of Polymarket volume, and research cited by Kiplinger found that about 7 in 10 Polymarket accounts have lost money since 2022. A prediction market rewards being more right than the crowd — which is hard.

## How markets are settled

Every contract spells out its **resolution source** and rules before you trade: official statistics from the Bureau of Labor Statistics or NOAA, a league's final result, a named price index, or specified news outlets. Sources that aren't listed don't count.

- **Timing.** Kalshi says determination takes from about an hour to more than 12 hours after a market closes, depending on when the data arrives. Robinhood says sports usually settle within one or two business days, while election contracts can take weeks.
- **Disputes.** Kalshi has a settlement window in which a result can be disputed and amended before it's finalized. Robinhood can't override the exchange's settlement, even if a sports app shows a different result.
- **Wording matters.** "More than 100" and "100 or more" settle differently. If a contract's wording is ambiguous, skip it.
- **Cancellations.** Postponed and cancelled events follow each contract's own rules. OG, for example, treats an event not completed within 48 hours as cancelled and settles at a volume-weighted average price.

## Are prediction markets accurate?

Often — but they're forecasts, not crystal balls.

- **The case for.** A long-run study of the Iowa Electronic Markets from 1988 to 2004 found the market was closer to the final result than polls 74% of the time across 964 comparisons, with an average error of 1.82 points versus 3.37 for polls. Economists Justin Wolfers and Eric Zitzewitz concluded that market forecasts are "typically fairly accurate."
- **The case against.** Robert Erikson and Christopher Wlezien found that once poll leads are properly discounted, poll-based forecasts beat the same markets. Other research shows a **favorite–longshot bias**: far from expiry, long shots tend to be overpriced and favorites underpriced.
- **What it means for you.** A price of 30¢ means the outcome should happen about 3 times in 10. Markets can be well calibrated and still "wrong" on any single event.

## What you can trade

- **Sports:** game winners, spreads, totals, player props and combos (multi-leg positions) — where your state and platform allow them.
- **Politics:** elections, the balance of Congress, policy decisions.
- **Economics:** Fed decisions, inflation, jobs reports, GDP.
- **Weather and climate:** daily temperatures, hurricanes, snowfall.
- **Crypto and financial markets:** price ranges for Bitcoin, stock indexes and commodities.
- **Culture:** awards, entertainment, technology and more.

Not every platform lists every category. Interactive Brokers' ForecastEx has no sports markets, for example, and some states restrict sports contracts. See [are prediction markets legal in the US?](https://safebet.ai/us/prediction-markets/are-prediction-markets-legal/) for the state-by-state picture.

## Risks to understand before you trade

- **You can lose your whole stake.** A contract you buy at 70¢ is worth $0 if you're wrong.
- **Liquidity.** In thin markets you may not be able to sell at a fair price, or at all, before settlement.
- **Resolution risk.** Ambiguous rules and disputed outcomes happen, even on regulated platforms.
- **Regulatory change.** Court rulings can switch off sports contracts in your state with little notice.
- **Taxes.** Profits are taxable and the rules for event contracts are unsettled — see our [tax guide](https://safebet.ai/us/guides/gambling-taxes/).

Set a budget before you start, and use the deposit limits and self-exclusion tools every platform offers. Our [responsible gambling guide](https://safebet.ai/us/guides/responsible-gambling/) lists them.

## Getting started

1. **Pick a CFTC-regulated platform** that's available in your state — compare them in our [prediction market ranking](https://safebet.ai/us/prediction-markets/).
2. **Verify your identity.** Expect to give your name, date of birth and address, and often a photo of your ID or part of your Social Security number. You must be 18 or older (21 at Interactive Brokers).
3. **Fund your account by bank transfer** to avoid card fees.
4. **Start small with limit orders**, and read each contract's rules before you trade.

## Frequently asked questions

### Who sets the prices on a prediction market?

Other traders. Buyers and sellers post orders in an order book, and a trade happens when a buyer's price meets a seller's. The exchange doesn't set prices or take the other side of your trade; it earns a fee on each trade.

### What happens if I buy a contract and the event happens?

Each winning contract pays $1 when the market settles. If you bought at 38¢, your profit is 62¢ per contract, minus fees. If the event doesn't happen, the contract expires worthless.

### Can I sell a contract before the event?

Yes, at the current market price, as long as another trader is willing to buy. On Interactive Brokers' ForecastEx you close a position by buying the opposite side instead of selling.

### How long does it take to get paid?

It depends on the resolution source. Kalshi says determination takes from about an hour to more than 12 hours after a market closes, and sports contracts on Robinhood usually settle within one or two business days. Election markets can take weeks.

### Are prediction markets more accurate than polls?

Sometimes. A long-run study of the Iowa Electronic Markets found the market beat polls 74% of the time, but other research finds that properly adjusted polls and statistical forecasts can do as well or better. Treat prices as useful estimates, not certainties.

### Do I need crypto to use a US prediction market?

No. The CFTC-regulated platforms in our ranking work in US dollars and accept bank transfers and debit cards; some also accept crypto deposits.

## Sources

1. [Understanding Prediction Markets and Event Contracts](https://www.cftc.gov/LearnandProtect/PredictionMarkets) — Commodity Futures Trading Commission, accessed 2026-09-30
2. [CFTC Glossary](https://www.cftc.gov/LearnandProtect/AdvisoriesAndArticles/CFTCGlossary/index.htm) — Commodity Futures Trading Commission, accessed 2026-09-30
3. [Market Settlement (API documentation)](https://docs.kalshi.com/getting_started/market_settlement.md) — Kalshi, accessed 2026-09-30
4. [Market Resolution](https://docs.polymarket.us/learn/markets/market-resolution.md) — Polymarket US, accessed 2026-09-30
5. [Event contract settlement](https://robinhood.com/us/en/support/articles/event-contracts-settlement/) — Robinhood, 2026-08-26
6. [How Forecast Contracts Work](https://forecastex.com/about/how-forecast-contracts-work) — ForecastEx, accessed 2026-09-30
7. [Prediction market accuracy in the long run (International Journal of Forecasting 24(2))](https://www.biz.uiowa.edu/faculty/trietz/papers/long%20run%20accuracy.pdf) — Berg, Nelson & Rietz, 2008
8. [Prediction Markets (Journal of Economic Perspectives 18(2))](https://doi.org/10.1257/0895330041371321) — Wolfers & Zitzewitz, 2004
9. [Are Political Markets Really Superior to Polls as Election Predictors? (Public Opinion Quarterly 72(2))](https://doi.org/10.1093/poq/nfn010) — Erikson & Wlezien, 2008
10. [Do Prediction Markets Produce Well-Calibrated Probability Forecasts? (Economic Journal 123(568))](https://doi.org/10.1111/j.1468-0297.2012.02561.x) — Page & Clemen, 2013
11. [Understand Prediction Markets Before They Come For You](https://www.kiplinger.com/personal-finance/understanding-prediction-markets-before-they-come-for-you) — Kiplinger, 2026-08-11
12. [Electoral Predictions on Polymarket (Journal of Quantitative Description: Digital Media)](https://doi.org/10.51685/jqd.2026.011) — Dahlke, Mine, Zhao, Huang & Shah, 2026-05-28