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How prediction markets work.
Short answer
A prediction market lists contracts that pay $1 if an event happens and $0 if it does not. Traders buy and sell those contracts, so the price in cents is the market’s rough probability: 63 cents means about a 63% chance, before fees and spread.
What is a prediction market?
A prediction market is an exchange for contracts tied to a future event. “Will the Chiefs win on Sunday?” or “Will the Fed cut rates in December?” becomes a market with two sides, Yes and No. Each contract settles at $1 if its side is correct and $0 if it is not.
Because the payout is fixed at $1, the price tells you something. If traders are willing to pay 63 cents for Yes, the market as a whole is treating the event as roughly 63% likely. People who think the true chance is higher buy; people who think it is lower sell. The price moves until those two groups balance.
How a single trade works
Suppose you buy 100 Yes contracts at 63 cents. You pay $63. Someone on the other side effectively takes No at 37 cents and pays $37. The exchange holds the combined $100 until the event settles.
| Outcome | You receive | Your profit |
|---|---|---|
| Event happens (Yes) | $100 | +$37 |
| Event does not happen (No) | $0 | −$63 |
| You sell early at 70 cents | $70 | +$7 |
Two things follow. First, your break-even win rate is the price you paid: at 63 cents you need the event to happen more than 63% of the time to profit in the long run. Second, you do not have to wait for settlement. If news moves the price to 70 cents, you can sell to another trader and keep the 7-cent gain.
The platform is not the house. It matches buyers and sellers and earns money from trading fees, which matter more than most beginners expect.
Bid, ask and the price you actually get
The headline price on a market page is often the last trade or a midpoint. What you can actually trade is the order book. The ask is the lowest price someone will sell Yes to you; the bid is the highest price someone will pay you for Yes. If Yes shows a 61-cent bid and a 64-cent ask, buying costs 64 cents, not 62.5.
Yes and No are mirror images. Buying No at 37 cents is economically similar to selling Yes at 63 cents. Add the best Yes ask and the best No ask together and you will usually get slightly more than $1. That excess is the spread, and it is one of the costs every trade pays.
How settlement works
Every market has written rules: the exact question, the deadline, the source that decides the outcome and what happens in edge cases such as postponements, ties or overtime. On regulated US exchanges such as Kalshi, the exchange determines the outcome under its published rules. Crypto-based venues use a resolution process defined by the platform, sometimes involving an oracle.
Read the rules before you trade. Two markets with nearly identical titles can settle differently. That is the most common reason a “guaranteed” trade across platforms fails, which we cover in our arbitrage guide.
Converting prices into other formats
Sports bettors think in moneylines; quants think in probabilities. The conversions are mechanical. A Yes price of 63 cents means:
| Format | Value | How it is calculated |
|---|---|---|
| Implied probability | 63% | price ÷ $1 |
| Decimal odds | 1.587 | 1 ÷ 0.63 |
| American odds | −170 | −100 × 0.63 ÷ 0.37 |
| Profit per $1 contract | $0.37 | $1 − $0.63 |
Our free prediction market odds calculator does these conversions for any price and shows the payout for your contract count.
Why prices can be informative
Prediction markets aggregate information from everyone willing to put money behind an opinion. Traders who are consistently wrong lose money and trade less; traders who are consistently right gain capital and influence. Over many events, that tends to push prices toward well-calibrated probabilities. Economists Justin Wolfers and Eric Zitzewitz reviewed this evidence in “Prediction Markets” (Journal of Economic Perspectives, 2004).
Where the price stops being a probability
- Fees and spread. Your true break-even is the ask plus the fee per contract, not the headline price.
- Thin liquidity. A market with a few hundred dollars of depth can be moved by one trader.
- Longshot bias. Cheap contracts on unlikely outcomes are often priced above how frequently they win.
- Time value. Money locked until a year-end settlement has a cost, which can pull long-dated prices away from pure probability.
- Rules. The price reflects the contract’s exact wording, not the headline question.
We go deeper on measuring this in are prediction markets accurate?
Where Kelix fits
Kelix builds research tools for people who want to test whether a price is wrong rather than guess. Kelix Lines puts sports model probabilities next to available Kalshi, Polymarket and sportsbook prices. Kelix Lab is for turning an idea into rules and backtesting it after costs.
Frequently asked questions
What is a prediction market?
An exchange where people trade contracts tied to future events. Each contract usually pays $1 if the stated outcome happens and $0 if it does not, so prices move between 0 and 100 cents.
Is a prediction market price a probability?
Approximately. A Yes contract at 63 cents implies roughly a 63% chance before fees. The bid-ask spread, fees, thin liquidity and the exact settlement rules all move the real break-even away from the headline price.
Who pays you when you win?
The exchange matches a Yes buyer with a No buyer. Together they fund the $1 payout, which is held until the market settles. The winner receives $1 per contract; the platform earns trading fees rather than betting against you.
Can you sell before the event ends?
Usually yes. You can sell to another trader at the current bid, locking in a gain or loss before settlement. Whether you can exit at a fair price depends on liquidity.
Educational content, not financial, legal or tax advice. Prediction markets involve risk, including loss of capital. Examples are illustrative calculations, not live quotes or trading results. Kelix is independent of Kalshi, Polymarket, Robinhood and sportsbooks.