# What Are Prediction Markets?

> Prediction markets let you trade shares that pay $1 if an event happens. Learn how prices become probabilities, how they settle, the risks and how to start.

Source: https://learn.tradelabsai.com/prediction-markets/what-are-prediction-markets/  
Track: Prediction Markets · Level: Beginner · Updated: 2026-10-03  
Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice.  
Cite as: TradeLabs Learn, "What Are Prediction Markets?", https://learn.tradelabsai.com/prediction-markets/what-are-prediction-markets/

A prediction market is a market where people trade on the outcome of future events. Instead of buying a share of a company, you buy a share in an answer, such as "Yes, this will happen" or "No, it will not." When the event is decided, every correct share pays out a fixed amount, usually $1, and every incorrect share pays nothing. Because of that simple payout, the price of a share can be read as the crowd's estimate of how likely the outcome is.

## How a prediction market works

Take a question like "Will Bitcoin close above $100,000 on Friday?" The market offers two kinds of shares:

- **Yes shares** pay $1 if the answer turns out to be yes.
- **No shares** pay $1 if the answer turns out to be no.

Before the event, both trade between $0 and $1. If Yes trades at 62¢, No trades at roughly 38¢, because exactly one of them will be worth $1 at the end. Together, a Yes and a No share are always worth $1 at settlement.

*Figure: A 62¢ Yes price means the market as a whole puts the chance near 62%.*

## Prices as probabilities

If a Yes share costs 62¢ and pays $1 when right, buying it only makes sense if you think the true chance is above 62%. If many traders thought the chance was 80%, they would keep buying until the price rose toward 80¢. If they thought it was 40%, they would sell until it fell. So the price settles around the level where buyers and sellers disagree evenly, which is the market's implied probability.

That reading has limits. The price includes a [Bid-Ask Spread](https://learn.tradelabsai.com/markets/bid-ask-spread/), thin markets can be moved by a single large trader, and people tend to overpay for long shots. Read [Reading Odds as Probabilities](https://learn.tradelabsai.com/prediction-markets/reading-odds-as-probabilities/) for how to adjust for those effects.

**Example: Profit and loss on one share**
You buy 100 Yes shares at 62¢, costing $62.
If the event happens, they pay $100: a profit of $38.
If it does not, they pay $0: a loss of $62.
Your break even win rate at that price is 62%. Over many similar trades, you only profit if you are right more often than the prices you pay imply. That idea is [Expected Value](https://learn.tradelabsai.com/math/expected-value/), and it is the heart of every prediction market strategy.

## You do not have to wait for the end

Shares trade continuously, so you can sell before the event is decided. If you bought Yes at 62¢ and new information pushes the price to 75¢, you can sell and lock in 13¢ a share without waiting. This makes prediction markets behave like any other market: prices react to news, and traders can profit from changes in the crowd's opinion as well as from the final outcome.

## How markets get settled

Every market has written rules that say exactly how the outcome is decided and from which source. This is called resolution. Good rules name a specific data source and time, for example a particular price feed at 4:00 p.m. Eastern time. Before trading any market, read its rules. Many disputes happen because traders assumed a question meant something it did not.

On Polymarket, the largest crypto based prediction market, most markets are resolved through UMA's optimistic oracle, where a proposed answer can be challenged before it becomes final. Its short term crypto up or down markets settle automatically on price data from Chainlink. See [How Polymarket Works](https://learn.tradelabsai.com/prediction-markets/how-polymarket-works/) and [Price to Beat and How Rounds Settle](https://learn.tradelabsai.com/prediction-markets/price-to-beat/).

## What people trade

| Category | Example question |
|---|---|
| Crypto prices | Will Bitcoin be up or down over the next 15 minutes? |
| Economics | Will the Federal Reserve cut rates at its next meeting? |
| Politics | Who will win a given election? |
| Sports | Who will win the match? |
| Culture and technology | Will a product launch before a set date? |

Short crypto markets are the fastest moving. On Polymarket, Bitcoin and other major coins have rolling rounds that ask whether the price will finish a 5 minute or 15 minute window above where it started. These work very differently from long dated political markets and are covered in [Up or Down Markets Explained](https://learn.tradelabsai.com/prediction-markets/up-or-down-markets-explained/).

## A short history

Prediction markets are older than the internet. The University of Iowa has run the [Iowa Electronic Markets](https://en.wikipedia.org/wiki/Iowa_Electronic_Markets) for research since 1988, letting people trade small amounts on elections. Studies of these and similar markets found that their prices were often as accurate as, or more accurate than, polls. Crypto based platforms later made it possible to run large global markets with stablecoins, and regulated exchanges in the United States now list event contracts under oversight from the CFTC. See the background on [prediction markets](https://en.wikipedia.org/wiki/Prediction_market).

## The risks

- **You can lose your whole stake on each share.** A share bought at 62¢ goes to zero if you are wrong.
- **Resolution risk.** Unclear rules or a disputed outcome can settle a market differently from what you expected.
- **Liquidity.** Small markets can have wide spreads and few buyers when you want to sell.
- **Platform and legal risk.** Crypto platforms carry smart contract and custody risk, and the rules on who may use which platform differ by country and change over time. Check what is allowed where you live.
- **Behavior.** Fast markets, especially 5 minute rounds, can feel like a game and encourage overtrading. The same discipline you would use in any market applies; see [Overtrading](https://learn.tradelabsai.com/psychology/overtrading/) and [Position Sizing](https://learn.tradelabsai.com/risk/position-sizing/).

**Watch out: Treat it like trading, because it is**
Set a maximum stake per market and per day before you start, and keep a record of every trade. A strategy that wins 55% of the time at prices averaging 60¢ still loses money.

## Getting started sensibly

1. Learn how prices relate to probabilities and [Expected Value](https://learn.tradelabsai.com/math/expected-value/).
2. Pick one market type and learn its rules and data source completely.
3. Start very small, and track your results against the prices you paid.
4. Watch how prices react to information before you risk money.

If you want to watch Polymarket's short Bitcoin rounds alongside the live price they settle on, the [TradeLabs AI chart](https://tradelabsai.com/chart) shows each round, its price to beat and the market's odds as they move.

Next, see exactly how the largest platform works in [How Polymarket Works](https://learn.tradelabsai.com/prediction-markets/how-polymarket-works/), then learn to judge odds in [Reading Odds as Probabilities](https://learn.tradelabsai.com/prediction-markets/reading-odds-as-probabilities/).

## Frequently asked questions

### How do you make money on a prediction market?

You buy shares in an outcome at a price below $1. If the outcome happens, each share pays $1. You can also sell before the event if the price rises. You profit over time only if you are right more often than the prices you pay imply.

### Are prediction market prices accurate?

Often they are reasonably accurate, and research on markets like the Iowa Electronic Markets found them competitive with polls. They can still be wrong, especially in thin markets or when traders overpay for unlikely outcomes.

### What happens if a market is resolved incorrectly?

Each platform has its own dispute process. On Polymarket, most markets resolve through UMA's optimistic oracle, where a proposed outcome can be challenged before it becomes final. Always read a market's rules before trading it.

### Is Polymarket legal?

It depends on where you live, and the rules have changed over time. Check the platform's current terms and your local laws before using any prediction market.

## Sources

- Wikipedia, [Prediction market](https://en.wikipedia.org/wiki/Prediction_market)
- Wikipedia, [Iowa Electronic Markets](https://en.wikipedia.org/wiki/Iowa_Electronic_Markets)
- Polymarket, [Documentation](https://docs.polymarket.com/)
- U.S. Commodity Futures Trading Commission, [Learn and protect](https://www.cftc.gov/LearnandProtect)

## Continue learning

- Next lesson: [How Polymarket Works](https://learn.tradelabsai.com/prediction-markets/how-polymarket-works/)
- Related: [What Is Trading?](https://learn.tradelabsai.com/start-here/what-is-trading/): Trading means buying and selling assets to profit from price changes. Learn how it works, who trades, what moves prices and the real risks involved.
- Related: [How Polymarket Works](https://learn.tradelabsai.com/prediction-markets/how-polymarket-works/): A clear guide to how Polymarket works: Yes and No shares, the order book, USDC, fees, how markets resolve through UMA and Chainlink, and the risks to know.
- Related: [Reading Odds as Probabilities](https://learn.tradelabsai.com/prediction-markets/reading-odds-as-probabilities/): Learn to turn prediction market prices into probabilities, adjust for spreads and long shot bias, compare with your own estimate and find value with expected value.
- Related: [Up or Down Markets Explained](https://learn.tradelabsai.com/prediction-markets/up-or-down-markets-explained/): Polymarket's up or down markets ask whether a coin finishes a short window above its start price. Learn the round lengths, settlement sources, pricing and risks.
- Related: [Price to Beat and How Rounds Settle](https://learn.tradelabsai.com/prediction-markets/price-to-beat/): The price to beat is the start price an up or down round must match or beat for Up to win. Learn where it comes from and why it differs from your exchange.
- Related: [Expected Value](https://learn.tradelabsai.com/math/expected-value/): Expected value is the average result of a bet over many repetitions. Learn the formula, trading and prediction market examples, and why EV alone is not enough.
- Related: [Bid-Ask Spread](https://learn.tradelabsai.com/markets/bid-ask-spread/): The bid-ask spread is the gap between the best price to buy and the best price to sell. Learn how to read it, what it costs you and how to pay less of it.