What Are Prediction Markets?

What are prediction markets and how does a contract price map to a probability?

A prediction market is essentially a market for bets on future events. Traders buy contracts tied to a specific outcome; each contract pays a fixed amount if the outcome happens and nothing if it does not. The contracts make possible a single, continuously updated price that reflects everyone’s bids, offers and trades.

That price is commonly read as an implied probability. For example, if a contract that pays $1 if Candidate A wins trades at 62¢, the market is saying Candidate A has roughly a 62% chance, according to current buy and sell activity. It’s important to remember that this is the market’s consensus at that moment — an estimate, not a guarantee.

Who creates markets and what do “Yes” and “No” contracts mean when I trade?

Someone — either a trader or the platform — opens a market by defining a question and the resolution conditions (for example, “Will Country X pass bill Y by date Z?”). The event definition determines exactly what must happen for contracts to pay out, so the wording and timing are part of the market’s rules.

Traders then buy and sell event contracts. A Yes contract — an event contract that pays $1 if the event happens — is the typical example. A No contract would pay $1 if the event does not happen. When the event is resolved, the winning side pays $1 per contract and the losing side pays $0.

How do prices move and why do platforms sometimes differ in what they show?

Prices move as people place orders: higher demand for Yes contracts pushes the price up, while higher demand for No contracts pushes it down. Markets combine information from many participants, each bringing different knowledge or incentives, and they update in real time as new information arrives. That aggregation — many small judgments becoming one price — is the fundamental signal people read.

Different platforms can show different prices because of differences in liquidity, participant mix and market mechanics. Some markets use continuous order books like traditional exchanges; others use automated market makers (AMMs) that quote prices from a funding pool and a formula. Those differences affect execution, fees and how sensitive the price is to individual trades, even though the basic idea — price as collective judgment — is the same.

If I buy one contract at 62¢, what are my possible outcomes and how do fees change the math?

If a Yes contract costs 62¢ and pays $1 if the event happens, buying one contract costs $0.62. If the event happens, the contract pays $1, so the gain before fees is $0.38. If the event does not happen, the contract expires at $0, so the loss is $0.62.

That 62¢ price is often read as a 62% implied probability, but you should factor in trading costs. Fees or platform spreads will reduce the realized gain, and on thin markets the spread between buy and sell prices can be substantial relative to the outright price movement.

What mistakes do people commonly make when interpreting market prices?

One common error is confusing price with certainty. A market price is an estimate, not a promise. Even a high price (say 95¢) does not mean the outcome is certain; it means most traders currently put a high probability on it, but unexpected events can still change the result.

People also treat every market as equally informative. Some markets attract more informed or active traders than others. Thinly traded markets can move on a single large trade and be misleading until more participants set the price, so look at liquidity and trade volume when judging how much weight to give a quote.

Finally, many users ignore how the question is defined. Resolution rules matter: if a market’s question is vague about timing or conditions, the price is less useful. Always read the event definition before interpreting the price.

Further reading on prediction markets

• How Do Prediction Markets Work?
• What Are Yes/No Contracts?
• How to Read Prediction Market Prices