What Are Prediction Markets?

A prediction market is an exchange where people can trade financial contracts whose value is tied to the outcome of an unknown future event.

While a traditional stock market allows you to invest in the future success of a company (like Apple or Tesla), a prediction market allows you to invest directly in the likelihood of a real-world occurrence, such as the winner of an election, the outcome of a sporting event, or the next interest rate hike.

The Core Mechanic: Yes/No Shares

Almost all modern prediction markets (including Polymarket and Kalshi) operate using binary event contracts. These contracts ask a specific, objectively resolvable question:

"Will the Federal Reserve cut interest rates in September?"

You can buy shares in two possible outcomes: "Yes" or "No".

These contracts always resolve to a fixed value, typically exactly $1.00.

• If the event happens, every "Yes" share pays out $1.00, and "No" shares become worthless ($0.00).
• If the event does not happen, every "No" share pays out $1.00, and "Yes" shares become worthless ($0.00).

Probability Pricing

Because the final payout is bounded between $0.00 and $1.00, the current trading price of a share is usually read as a market-implied probability.

If a "Yes" share is trading around $0.65, traders often interpret that as the market pricing the event at roughly 65%. That is a useful shortcut, but it is still a market price, not a guarantee.

You are never locked into a trade until the event resolves. If you buy a "Yes" share at $0.65, and breaking news pushes the market consensus to $0.80, you can instantly sell your share to lock in a $0.15 profit.

Why people find them useful

Prediction markets are useful because they combine forecasting with trading incentives. Prices update as information changes, and participants have money at risk when they decide a market is mispriced.

That does not mean markets are always right or always better than polls and experts. They work best when liquidity is decent, market rules are clear, and participants are actually informed.

FAQ

Does a 70-cent price mean the event has a 70% true chance?

It means the market is pricing it around that level. It is best treated as a tradable forecast, not a final fact.

Do prediction markets always outperform polls?

No. Sometimes they add useful signal, sometimes polls add useful signal, and often both should be read together.

What should I read next?

Read How Prediction Markets Work, How Prediction Market Odds Work, and Polls vs Prediction Markets.