Prediction Markets Explained: How Everyday Traders Are Profiting from Real-World Events

Every day, billions of dollars in decisions hinge on predictions about the future. Will the Fed cut rates next month? Will it rain in Chicago on Thursday? Will Bitcoin break $100,000 by year-end? Traditionally, the best forecasts came from polls, pundits, and institutional research — sources that are slow, biased, or both. Prediction markets offer something different: real-time probability estimates backed by real money. When people have actual dollars on the line, they tend to get serious about accuracy. That fundamental insight has turned prediction markets into one of the fastest-growing corners of finance, attracting everyone from retail speculators to quantitative firms running fully automated trading systems.

What Is a Prediction Market?

A prediction market is an exchange where participants buy and sell contracts tied to the outcome of real-world events. Instead of trading shares of a company or barrels of oil, you trade contracts that pay out based on whether something happens or not.

The concept is straightforward: if you believe an event is more likely to occur than the current market price implies, you buy. If you believe it is less likely, you sell. The market price, expressed in cents, represents the crowd’s consensus probability that the event will happen.

Prediction markets are sometimes called “event markets,” “decision markets,” or “information markets.” The underlying principle is the same across all of them: aggregate dispersed knowledge by giving people a financial incentive to be right.

A Brief History

The idea is not new. Election betting has existed in organized form since at least the 1800s, when Wall Street curb exchanges offered wagers on presidential races. The modern era began with the Iowa Electronic Markets in 1988, an academic project at the University of Iowa that demonstrated prediction markets could outperform polls in forecasting elections.

The 2020s brought an explosion of mainstream platforms. Kalshi received CFTC approval in 2020 to operate as a regulated exchange in the United States. Polymarket launched as a crypto-native alternative and grew rapidly during the 2024 U.S. presidential election cycle, processing hundreds of millions of dollars in volume. Today, prediction markets cover everything from weather and economics to sports and geopolitics.

How Prediction Markets Work

The Binary Contract

The most common instrument is the binary contract, sometimes called a “yes/no” contract. Each contract is tied to a specific question with a clearly defined resolution criteria. For example:

• “Will the S&P 500 close above 6,000 on February 28?”
• “Will the daily high temperature in New York exceed 50 degrees F tomorrow?”
• “Will the Federal Reserve cut rates at the March FOMC meeting?”

Each contract trades between $0.01 and $0.99 (one cent to ninety-nine cents). If you buy a “Yes” contract at $0.35, you are paying 35 cents for a contract that will either pay out $1.00 if the event happens, or $0.00 if it does not. The price effectively represents a 35% implied probability.

How Pricing Works

Contract prices are set by supply and demand on an order book, just like stocks. There is no house setting the odds. Buyers post bids, sellers post offers, and when they match, a trade executes.

Here is the key relationship: the price of a Yes contract plus the price of a No contract always equals $1.00 (or very close to it, minus the spread). If “Yes” trades at $0.65, then “No” effectively trades at $0.35. This zero-sum structure means that every dollar one trader makes, another trader loses — before fees.

As new information enters the market, prices adjust in real time. If a surprise jobs report comes out strong, contracts on “Will GDP growth exceed 3%?” might spike from $0.40 to $0.60 within minutes. This makes prediction markets a remarkably fast signal for tracking how consensus shifts in response to new data.

Settlement and Payouts

When a contract’s expiration date arrives, the exchange determines the outcome using predefined resolution sources. For weather markets, this might be official NOAA data. For financial markets, it could be the official closing price from the relevant exchange. For political events, it typically references official government announcements or certified results.

If you hold a “Yes” contract and the event occurs, you receive $1.00 per contract. If the event does not occur, your contract expires worthless at $0.00. The reverse applies if you hold “No.”

You do not have to wait for settlement. You can exit your position at any time by selling your contracts back into the order book. This is where a significant portion of profit is made — buying at one price and selling at a higher price as conditions change, rather than holding all the way to settlement.

Fee Structures

Fees vary by platform, and they matter more than most beginners realize.

Kalshi charges a fee on each trade, typically around 7 cents per contract on both sides of a round-trip trade (buying and selling). There is also a fee structure on settlement payouts. These fees are important to factor into any strategy — a contract bought at $0.50 and sold at $0.55 might look like a 10% gain, but after fees the net profit is significantly smaller.

Polymarket operates differently. Since it runs on blockchain infrastructure, there are no platform trading fees on most markets. However, traders face blockchain gas fees for deposits and withdrawals, and the spread between bid and ask prices acts as an implicit cost.

Understanding your platform’s fee structure is essential before placing any trades. Strategies that look profitable on paper can become losers after fees are accounted for. For a detailed breakdown, see our guide on event contract pricing and probability.

Major Prediction Market Platforms

Kalshi — The Regulated U.S. Exchange

Kalshi is the first CFTC-regulated prediction market exchange in the United States. Being regulated by the Commodity Futures Trading Commission means Kalshi operates under the same legal framework as futures exchanges like the CME. Customer funds are segregated, contracts are legally enforceable, and the exchange is subject to regular regulatory oversight.

Kalshi offers markets across a wide range of categories: economics (Fed rate decisions, inflation, GDP), weather (temperature, rainfall, snowfall for specific cities and dates), financial markets (S&P 500 closing ranges, individual stock milestones), and current events. The platform accepts standard U.S. bank deposits and provides 1099 tax reporting.

For U.S.-based traders who want regulatory clarity and straightforward tax treatment, Kalshi is the default choice. Read our full Kalshi review for a deeper look at the platform’s strengths and limitations.

Polymarket — The Crypto-Native Platform

Polymarket is built on the Polygon blockchain and operates outside traditional U.S. financial regulation. It has become the highest-volume prediction market globally, particularly for political and crypto-related events.

Polymarket’s strengths are its deep liquidity on high-profile markets, zero trading fees, and permissionless access (no KYC required for basic trading). Its weaknesses include the lack of regulatory protection, the need to manage crypto wallets, and limited recourse if disputes arise about market resolution.

Polymarket uses USDC (a dollar-pegged stablecoin) for all trades, so users need to be comfortable with basic cryptocurrency operations like bridging funds and managing wallet keys.

Other Platforms

PredictIt is an academic-oriented platform run by Victoria University of Wellington under a CFTC no-action letter. It has an $850 position limit per market and a 10% fee on profits, which severely limits its utility for serious trading. It focuses almost exclusively on political markets.

Metaculus and Manifold are prediction platforms that use reputation points or play money rather than real dollars. They are useful for practicing and calibrating your forecasting skills but are not trading venues.

Types of Markets You Can Trade

Weather Markets

Weather markets are among the most active on Kalshi. You can trade on whether the daily high temperature in a specific city will exceed a certain threshold, whether it will rain, or how much snow will fall. These markets settle using official NOAA weather station data.

Weather trading is appealing because high-quality forecast data is widely available, and the markets settle on short timeframes — often the next day. This creates frequent trading opportunities.

Economic and Financial Markets

Will the Fed raise, hold, or cut rates? Will CPI come in above or below consensus? Will the S&P 500 close within a specific range today? Economic markets let you trade directly on macroeconomic outcomes that traditionally required complex derivatives to express.

Range markets are particularly interesting. Instead of a single yes/no question, a series of contracts covers different ranges (e.g., “S&P 500 closes between 5,950 and 6,000”). Only one range pays out, creating a probability distribution across outcomes that you can trade against.

Political and Geopolitical Events

Who will win the next presidential election? Will a specific piece of legislation pass? Political markets gained massive mainstream attention during the 2024 election cycle, with Polymarket processing over $3 billion in election-related volume.

These markets tend to have long time horizons and can be highly illiquid between major news events. They also attract strong partisan biases, which can create opportunities for disciplined traders who rely on data rather than gut feelings.

Crypto and Technology

Will Bitcoin reach a certain price by a certain date? Will Ethereum complete a major upgrade? Will a specific tech company hit a market cap milestone? Crypto-adjacent prediction markets are especially active on Polymarket.

How to Get Started

Step 1: Choose a Platform

If you are a U.S. resident looking for regulatory protection and tax simplicity, start with Kalshi. If you are comfortable with crypto wallets and want access to the broadest range of markets with lower fees, Polymarket is worth exploring. Many active traders use both.

Step 2: Fund Your Account

On Kalshi, you can deposit directly from a U.S. bank account via ACH transfer. On Polymarket, you will need to acquire USDC and bridge it to the Polygon network.

Start small. Deposit an amount you are comfortable losing entirely while you learn the mechanics. $50 to $200 is a reasonable starting range.

Step 3: Understand the Market You Are Trading

Before placing any trade, make sure you understand:

• The exact resolution criteria. What source determines the outcome? What happens in edge cases?
• The settlement timeline. When exactly does this contract expire and pay out?
• The fee impact. After fees, what is your actual breakeven price?
• The liquidity. How wide is the bid-ask spread? Can you exit if you need to?

Step 4: Place Your First Trade

Start with a market you understand well. If you follow weather closely, try a temperature market. If you track the Fed, try a rate decision market. Buy a small position — one to five contracts — and watch how the price moves in response to new information. Your goal with the first few trades is to learn the mechanics, not to make money.

Step 5: Develop a Process

Successful prediction market trading is not about having opinions. It is about identifying situations where the market price diverges from the true probability, and doing so consistently. This requires:

• A reliable source of information or a model that estimates probabilities
• Discipline to only trade when you have an edge, not when you are bored
• Rigorous tracking of your results to identify what is working and what is not

Risks and Considerations

You Can Lose Your Entire Position

Binary contracts go to $0.00 or $1.00. If you buy at $0.50 and the event does not occur, you lose 100% of what you paid. There is no partial recovery. This is not like a stock that might decline 10% — your position can go to zero overnight.

Fees Erode Thin Edges

Many beginners are drawn to contracts priced near $0.50, thinking they offer the best risk-reward. In practice, the fees on these contracts eat into margins significantly. A contract bought at $0.50 and sold at $0.55 generates $0.05 in gross profit, but after round-trip fees on a platform like Kalshi, the net profit may be only $0.01 or $0.02 — or even negative.

Liquidity Risk

Not all markets are liquid. Thinly traded contracts can have wide bid-ask spreads, making it difficult to enter or exit at a fair price. Always check the order book depth before trading. If you cannot exit a position without significant slippage, the market is too illiquid for your size.

Regulatory Uncertainty

The regulatory landscape for prediction markets is still evolving. The CFTC has approved certain event contracts on Kalshi, but has also challenged others (notably political event contracts, which were the subject of litigation in 2024). Polymarket operates in a regulatory gray area for U.S. users. Rules can change, and platforms that operate today may face restrictions tomorrow.

Emotional and Cognitive Biases

People are notoriously bad at estimating probabilities. Overconfidence, anchoring, and confirmation bias can lead to systematic losses. The most dangerous trap is trading based on what you want to happen rather than what the data suggests will happen.

Key Takeaways

• Prediction markets are exchanges where you buy and sell contracts tied to real-world event outcomes, not traditional financial assets.
• Prices represent probabilities. A contract trading at $0.70 implies a 70% chance the event will occur, as estimated by the market.
• Binary contracts settle at $1.00 or $0.00. You profit by buying low and selling high before settlement, or by holding through settlement on the correct side.
• Kalshi is the go-to regulated platform for U.S. traders, offering CFTC oversight, bank deposits, and tax reporting. Polymarket offers deeper liquidity and lower fees but requires crypto infrastructure and lacks regulatory protection.
• Fees matter more than you think. Always calculate your net profit after fees before deciding whether a trade is worth taking.
• Start small and learn the mechanics. Fund a small account, trade markets you understand, and focus on building a repeatable process before scaling up.
• Prediction markets reward discipline, not opinions. The edge comes from consistently identifying mispricings, not from having strong views on outcomes.

Whether you are a seasoned trader looking for a new asset class or a complete beginner curious about event-driven trading, prediction markets offer a unique way to put your knowledge and analytical skills to work. The space is still early, the tools are improving rapidly, and the opportunities for informed participants are real. Before you dive in, make sure to review the 5 costly mistakes new traders make so you can avoid the most common pitfalls.