# What a prediction market is, and how one works

A contract that pays one dollar if a stated event happens. What you buy, who takes the other side, who decides, and when the cents stop meaning a probability.

*https://predictionmarkets.tools/guides/what-a-prediction-market-is · background to Prediction Market Venues*

**Answer:** A prediction market is a venue where you buy a contract that pays a fixed one dollar if a stated event happens and nothing if it does not. You pay cents, so the price reads as a probability. Four different mechanisms put that price on the screen and four different parties decide the outcome, and which pair you get changes what the number means. Whether you can trade at all is a jurisdiction question, not a product one.

Every other page on this site answers "which tool". This one answers the question underneath
that, because a reader who does not already know what is being bought cannot use any of the
answers: they will pick a venue, deposit, and discover that the thing they thought they had
bought is not what settled.

The generic explanation — markets aggregate information, the price is the crowd's probability —
is true, available in a hundred places, and useless at the point of deciding. It describes a
category as if every member of it worked the same way. They do not. The same question, on two
venues, is a different instrument with a different counterparty, a different party deciding the
outcome, a different fee shape and a different answer to whether you may trade it at all. That
divergence is the whole subject of this page.

## How it works

### What you are actually buying

A share of a fixed payout, priced in cents.

The mechanism is written most plainly in the exchanges' own rulebooks. The
[Polymarket US rulebook](https://polymarketexchange.com/files/legal/latest/rulebook) dated 14
September 2026 defines a Contract Outcome this way: if the Expiration Value satisfies the Payout
Condition, the Contract Outcome is $1.00 and the settlement amount goes to holders of long
positions; if it does not, the Contract Outcome is $0.00 and the settlement amount goes to the
holders of short positions. The
[ForecastEx rulebook](https://data.forecastex.com/regulatory/ForecastEx_LLC_Rulebook.pdf) dated
17 September 2026 says the same thing in its Rule 603 — a contract with a Settlement Value of
$1.00 is extinguished and the collateral account is credited $1.00.

Three consequences follow immediately, and they are the ones worth holding on to:

1. **The most you can make and the most you can lose are both known before you trade.** A
   contract bought at 62 cents risks 62 cents and can return 100. Nothing about that changes if
   the event turns out to be far more dramatic than expected.
2. **Yes and No are one dollar between them.** ForecastEx makes this structural rather than
   incidental: under Rule 401(c) participants bid prices between $0.01 and $0.99, and a Yes bid
   and a No bid are paired when their combined price reaches $1.00. Rule 604 closes the loop —
   when opposite contracts are offset, the account is credited $1.00 for each pair.
3. **You can leave before the event is decided.** This is the property that makes the thing a
   market rather than a ticket. On a venue with a live two-sided market you sell your position
   to somebody else at the going price, take the difference, and never find out how the question
   ended.

That last one is also the first place a reader's mental model breaks, so it is worth saying in
the negative: on a thin market, or a pool, the exit may not exist at any price you would accept.

### Why the price reads as a probability

Because the payout is fixed at a dollar, the price is a number between zero and one that the
market is willing to pay for that dollar. The CFTC has described the reading in its own
documents twice, twenty years apart. Its
[2008 concept release](https://www.federalregister.gov/documents/2008/05/07/E8-9981/concept-release-on-the-appropriate-regulatory-treatment-of-event-contracts)
says binary event contracts typically pay out a fixed amount when an outcome occurs or does not,
and that trading them "can facilitate the discovery of information by assigning probabilities,
through market-derived prices, to discrete eventualities". Its
[March 2026 advance notice](https://www.federalregister.gov/documents/2026/03/16/2026-05105/prediction-markets)
opens by saying prediction markets "function as information aggregation vehicles" because
contract prices reflect participants' aggregate beliefs, and cites the 2008 release for it.

Note what those sentences are careful about. They describe what the price *can* do, under
conditions neither document enumerates. The section below on where the reading breaks is that
missing enumeration, and it is the part a reader arriving at a venue for the first time actually
needs.

### Who is on the other side — four different answers

The single most useful thing to know about a venue, and the one least visible from its screen,
because all four mechanisms render as a percentage.

- **An order book.** Another user's resting order is your counterparty; the venue matches and
  charges a fee. If nothing is resting, there is no price, only a wide gap.
- **An automated market maker.** A curve funded by liquidity providers quotes you. There is
  always a price, and it always moves against you as your order grows.
- **A pool.** Nobody quotes anything. Everyone pays in, the pool is divided among the winners
  after the close, and the percentage shown while it was open was an estimate that kept moving.
- **The exchange itself.** [ForecastEx](https://predictionmarkets.tools/tools/forecastex) runs a book with no seller. Rule
  401(c) has the exchange execute the contract once a Yes bid and a No bid add to a dollar, and
  ForecastEx then carries the obligation to pay at settlement. Rule 608 requires every position
  to be fully collateralised at the clearing house, and Rule 401(i) adds that contracts are
  non-marginable and have no loan value — so the money behind both sides is already there.

Which one you are facing determines what your order does to the price, what a large order costs,
and whether an exit exists at all. The full version, with the numbers to check on each,
is [where the liquidity comes from](https://predictionmarkets.tools/guides/where-liquidity-comes-from); the
[prediction market venues](https://predictionmarkets.tools/categories/prediction-market-venues) listing names the mechanism on
every card.

### Who decides the outcome — three more different answers

Resolution is not a formality at the end. It is the product, and the venues answer it in ways
that have almost nothing in common.

- **The exchange, under a filed rulebook.** On the CFTC-regulated venues the exchange reads the
  source named in the contract terms, states the outcome, and its statement is the outcome. There
  is a named accountable entity and a published procedure. There is also no appeal.
- **An optimistic oracle with a bond behind it.** [UMA's own
  documentation](https://docs.uma.xyz/protocol-overview/how-does-umas-oracle-work) describes the
  design: a proposer posts an answer with a refundable bond, anyone may dispute it during a
  challenge period by posting a bond of their own, and a dispute escalates to the Data
  Verification Mechanism, where token holders vote. UMA puts the share resolved without a dispute
  at 99.8%. This is the only mechanism in this catalogue a third party can actually enter — and
  the only one where the deciding party has no support inbox and no obligation to you.
- **A price feed.** No committee has an opinion, which also means no committee notices when the
  feed prints something absurd for one second.

A fourth answer exists off to one side. On a play-money platform such as
[Manifold](https://predictionmarkets.tools/tools/manifold) the person who wrote the question resolves it, which is a real
mechanism rather than the absence of one, and it works exactly as well as the author's continued
interest.

The clause-by-clause version, including what each venue does when a question turns out to have no
clean answer, is [who decides the outcome](https://predictionmarkets.tools/guides/who-decides-the-outcome). Read it before you
size a position, not after.

### Who decides which questions exist

Not the trader, and on a US exchange not only the exchange either.

A designated contract market self-certifies a new contract with the Commission before listing it,
which is why the contract terms and the named settlement source are public documents before
trading opens. Against that sits CEA section 5c(c)(5)(C), the provision the Commission's
[June 2026 proposed rule](https://www.federalregister.gov/documents/2026/06/12/2026-11854/prediction-markets-public-interest-determinations)
is built around: the Commission may determine that an event contract is contrary to the public
interest where it involves "(I) activity that is unlawful under any Federal or State law; (II)
terrorism; (III) assassination; (IV) war; (V) gaming; or (VI) other similar activity determined
by the Commission, by rule or regulation, to be contrary to the public interest." That proposal —
published 12 June 2026 at 91 FR 35806, comment period closed 27 July 2026 — would define "gaming"
and set out when a contract "involves" one of those activities. Nothing in it binds anyone until
a final rule is published under the same RIN, 3038-AF65.

The constraint is real enough that exchanges write it into their own rules: ForecastEx Rule
401(b) says outright that it will not list markets deemed prohibited by the CFTC under that
section.

Away from the regulated venues the answer is different again — whoever can deploy the contract,
or any user the platform allows to create a question. Neither arrangement is a detail. It decides
which questions you will ever see, and it is why the same event is listed on one venue and
absent from the next.

### Whether you can trade it at all

This is a fact about your jurisdiction, not about the product, and merging the two is the most
expensive mistake a new reader makes. The same venue is a real-money venue in one country and
unreachable in the next, and the difference is a regulator's order, a clause a court read a
particular way, or a settlement signed last quarter — never a release note. It also fails at four
different moments: a location check at signup, a representation you make in a member agreement, a
payment rail that will carry money in but not out, and a single state removed from an app.

That is a page of its own:
[why a venue is unavailable where you are](https://predictionmarkets.tools/guides/why-a-venue-is-unavailable-where-you-are).
The narrower legal question underneath it — whether these contracts are swaps, which is what
decides who regulates them — is [event contract or swap](https://predictionmarkets.tools/guides/event-contract-vs-swap).

## Where the cents stop reading as a probability

Five conditions, each of which puts a wedge between the number on the screen and the odds a
careful reader would quote.

**1. Nothing is resting on the other side.** A price with no depth behind it is the last thing
somebody was willing to do, not a consensus. The measurements that tell you which you are looking
at — the gap between best bid and best ask in cents, and the money resting within two cents of
the midpoint — are in [where the liquidity comes from](https://predictionmarkets.tools/guides/where-liquidity-comes-from).

**2. The quote comes from a curve, not from a crowd.** On an automated market maker the displayed
price is a function of the pool's inventory. It will quote you when nobody else would, which is
the point, and your own order moves it, which is the cost.

**3. The fee is taken twice, and it is largest exactly where you are least certain.** The
[Polymarket US fee schedule](https://docs.polymarket.us/fees) in force from 17 September 2026
computes the charge as a coefficient times the number of contracts times price times one minus
price. At a taker coefficient of 0.0695 that is $1.74 on 100 contracts at 50 cents and seven
cents on 100 contracts at one cent. A 50-cent contract therefore costs about 51.7 cents to enter,
and you pay again to leave. The shape is deliberate and it is worth absorbing: the fee peaks
where the market is most uncertain, which is precisely where the probability reading was supposed
to be most informative.

**4. The dollar is locked until resolution, and it earns nothing while it waits.** ForecastEx
Rule 608 requires the position to be fully collateralised and Rule 401(i) states that contracts
are non-marginable and have no loan value. A contract at 90 cents resolving in a month and one at
90 cents resolving in two years are not the same claim about the world, because the second ties
up your money for twenty-four times as long at the same maximum return.

**5. The rule is narrower than the headline.** The price answers the payout condition written in
the contract terms — a named source, a named release, a stated time — and not the sentence you
read at the top of the page. Where those two come apart, the price is right and your reading of
it was wrong. This is common enough that it has its own page.

None of this means the number is useless. It means the number is a price first and a probability
second, and the gap between them is made of things you can actually measure before you trade.

## What a prediction market is not

Draw this line by mechanism rather than by tone, because tone is what people argue about and
mechanism is what determines whether you can get your money back.

**An instrument on this side of the line** has a two-sided price, lets you take either side of
the same question, and lets you exit before the event is settled. Those three together are what
make the price informative and what make the position tradeable. Remove the third and you have
something that only pays at the end; remove the second and the price is a quote rather than a
market.

**A forecasting platform is a different product**, and it is a separate category here for that
reason. You are scored rather than paid, the settlement is in points, and there is usually no
position to close. The overlap is visual — a question, a percentage, a crowd — and almost nothing
else agrees. What that score actually measures, and why a good score on one platform means very
little on another, is [what a forecasting score measures](https://predictionmarkets.tools/guides/what-a-forecasting-score-measures).

**A product that sells you an outcome, or tells you which side to take, is outside this catalogue
altogether.** This site lists software and venues; it does not list advice, and it never issues
any. The distinction is not squeamishness. A venue publishes a rulebook, names a settlement
source and can be checked against both; a recommendation publishes a claim about the future and
cannot be checked against anything until it is too late to matter.

## What it costs

Everything here is denominated against a fixed one-dollar payout, which makes small-sounding
numbers large. Convert every figure to the same measure — cost per dollar of payout — before
comparing two venues at all.

- **Polymarket US** charges, per its fee schedule effective 17 September 2026, a coefficient
  times contracts times price times one minus price. Taker coefficient 0.0695: $1.74 per 100
  contracts at a price of $0.50, falling to $0.07 per 100 at $0.01. Makers receive a rebate at a
  coefficient of −0.0125, which is $0.31 per 100 contracts at $0.50, applied at the point of
  trade.
- **ForecastEx** charges a flat $0.01 per contract, and its fee schedule states that the charge
  falls on both the Yes and the No side of each executed transaction, independently of
  resolution, netting or settlement. On a contract entered at 50 cents that is 2% of what you
  paid; on one entered at 5 cents it is 20% of what you paid, for the same one cent.
- **The spread** is a cost on both legs and appears on no fee schedule. On a market quoted 40
  bid, 44 offered, buying and selling immediately costs four cents on a dollar of payout before
  any fee at all.
- **The capital** is fully committed for the life of the contract, with no leverage and no loan
  value against it, so the real cost of a long-dated position includes whatever that money would
  otherwise have earned.

Venues publish these in units that do not compare — a coefficient, a percentage of what the fill
cost, a flat cent, a share of profit — and the conversion arithmetic for each, with the current
figures, is in [what a trade actually costs](https://predictionmarkets.tools/guides/what-a-trade-actually-costs).

## What you can do about it

**Read the rest in this order.** Each page assumes the one before it, and together they are the
whole decision.

1. [Where the liquidity comes from](https://predictionmarkets.tools/guides/where-liquidity-comes-from) — who is on the other
   side, and how to tell a real price from a lonely one. This is the page that changes what you
   think the percentage means.
2. [Who decides the outcome](https://predictionmarkets.tools/guides/who-decides-the-outcome) — the resolution mechanisms
   clause by clause, including what each venue does with a question that cannot be answered as
   written.
3. [What a trade actually costs](https://predictionmarkets.tools/guides/what-a-trade-actually-costs) — four incompatible fee
   units converted to one number, so that 3.00% on one venue can be compared with 1.75% on
   another.
4. [Why a venue is unavailable where you are](https://predictionmarkets.tools/guides/why-a-venue-is-unavailable-where-you-are)
   — the four separate restrictions that all get called "not available in your country".
5. [Event contract or swap](https://predictionmarkets.tools/guides/event-contract-vs-swap) — only if you want the legal frame
   under all of it. It is the most contested question in the sector and the least urgent one for
   a first deposit.

Then the [prediction market venues](https://predictionmarkets.tools/categories/prediction-market-venues) listing, where the
counterparty mechanism, the settlement currency and the resolution source are on every card.

**Check exactly three things before you fund an account.** In this order, because each can end
the exercise on its own.

1. **Can you open, fund *and* withdraw where you physically are?** Not one question, three. A
   location check fails before you sign up and costs you nothing; a withdrawal rail fails after
   your money is inside. Read the venue's own terms and its geographic-restrictions page, not a
   summary, and check whether the list that binds is the one you read or a separate document it
   incorporates.
2. **Who resolves, against which named source, on what timetable, and what happens if the
   question is ambiguous?** All four are published before you can trade on every venue in this
   catalogue. The fourth is the one nobody advertises, and the answer is usually that you get
   something near what you paid rather than the dollar you thought you had won.
3. **What a fill costs on this venue's mechanism, in cents per dollar of payout** — the fee at
   the price you actually want, plus the spread you cross to get in, plus the spread you will
   cross to get out, plus how much is resting at that price. A venue advertising no commission
   still charges you the spread twice.

**Start smaller than the position you have in mind, and hold it through one resolution.** The
mechanisms above are cheap to read about and expensive to learn from a support ticket. One
contract carried from entry to settlement tells you what the fee actually was, how long the money
was locked after trading stopped, and whether the resolution matched the headline — the four
facts that no page, including this one, can establish for your particular market.

**And know what this catalogue is and is not standing behind.** Every card here currently reports
`Tested hands-on: no`. The fields on them are read from each venue's own terms, rulebook, fee
schedule and documentation on a stated date, and the pages above cite the documents rather than
paraphrasing them. Where a sentence here rests on a primary source, the source is listed with its
date so you can check whether it has since been replaced.

## Tools this bears on

- [Kalshi](https://predictionmarkets.tools/tools/kalshi.md) — A CFTC-designated exchange for event contracts, settled in dollars against named sources.
- [Polymarket](https://predictionmarkets.tools/tools/polymarket.md) — Self-custody event contracts on an on-chain order book, resolved by the UMA oracle.
- [ForecastEx](https://predictionmarkets.tools/tools/forecastex.md) — Economic and climate contracts on a CFTC exchange that pays interest on your collateral.
- [Myriad](https://predictionmarkets.tools/tools/myriad.md) — Multi-chain event markets priced by an AMM and settled in stablecoins or in points.
- [Manifold](https://predictionmarkets.tools/tools/manifold.md) — Anyone can open a question, anyone can take a side, and the currency buys nothing.

## FAQ

### What is a prediction market, in one sentence?

A venue that lists a contract on whether a stated event happens, pays a fixed amount to whichever side was right, and lets the two sides trade that contract with each other until the event is decided. On the US exchanges the fixed amount is one dollar, so a contract trading at 62 cents costs 62 cents and pays 100 if the payout condition is met.

### Does the price mean the probability of the event?

It is the closest thing on the screen to one, and the CFTC's own 2008 concept release describes binary event contracts as assigning probabilities to outcomes through market-derived prices. It stops being a fair reading when there is no real depth on both sides, when the price comes from a curve rather than from other traders, once the fee on entry and exit is subtracted, and when the resolution rule is narrower than the headline.

### Who is on the other side of my trade?

One of four parties, depending on the venue. Another trader whose order was resting on an order book. A funded curve that quotes you and moves as you size up. A pool that nobody quotes at all and that is divided after the close. Or the exchange itself, which is how ForecastEx works, pairing a Yes bid and a No bid that add to a dollar and standing as counterparty to both.

### Can I sell before the event happens?

On a venue with a live two-sided market, yes, and that is the property that separates this instrument from a product that only pays out at the end. You sell at whatever the book or the curve will take, which may be worse than the price displayed, and you pay the fee a second time. On a pool, and on a market with nothing resting on the other side, there may be no exit at any price.

### Is it real money?

That is a question about your jurisdiction rather than about the product. Some venues in this catalogue settle in dollars at a clearing house, some in a stablecoin, and some in points that cannot be withdrawn at all. The same real-money venue can be open where you are and closed to a reader two time zones away, because the restriction comes from a regulator, a court or a settlement rather than from a release note.

### Who writes the questions?

On a CFTC-designated contract market the exchange does, and it self-certifies each contract with the Commission before listing it, which is why the terms and the named settlement source are public documents before trading opens. On a play-money platform such as Manifold any user can create a question, and the person who created it also resolves it.

## Sources

1. [Concept Release on the Appropriate Regulatory Treatment of Event Contracts, 73 FR 25669](https://www.federalregister.gov/documents/2008/05/07/E8-9981/concept-release-on-the-appropriate-regulatory-treatment-of-event-contracts) — U.S. Commodity Futures Trading Commission, 2008-05-07. The Commission's own March 2026 advance notice still quotes this release for its definition of a prediction market and cites it at note 2.
2. [Prediction Markets (advance notice of proposed rulemaking), 91 FR 12516, RIN 3038-AF65](https://www.federalregister.gov/documents/2026/03/16/2026-05105/prediction-markets) — U.S. Commodity Futures Trading Commission, 2026-03-16
3. [Prediction Markets; Public Interest Determinations (proposed rule), 91 FR 35806, RIN 3038-AF65](https://www.federalregister.gov/documents/2026/06/12/2026-11854/prediction-markets-public-interest-determinations) — U.S. Commodity Futures Trading Commission, 2026-06-12
4. [ForecastEx LLC Rulebook, Version Date September 17, 2026](https://data.forecastex.com/regulatory/ForecastEx_LLC_Rulebook.pdf) — ForecastEx LLC, 2026-09-17
5. [ForecastEx Fee Schedule](https://data.forecastex.com/regulatory/ForecastEx_Fee_Schedule.pdf) — ForecastEx LLC, read 2026-09-21
6. [Polymarket US Rulebook, September 14, 2026](https://polymarketexchange.com/files/legal/latest/rulebook) — QCX LLC d/b/a Polymarket US, 2026-09-14
7. [Trading Fee Schedule, effective exchange-wide 17 September 2026](https://docs.polymarket.us/fees) — Polymarket US, 2026-09-17
8. [Protocol Overview - How does UMA's oracle work?](https://docs.uma.xyz/protocol-overview/how-does-umas-oracle-work) — UMA Protocol, read 2026-09-21

*Last updated 2026-09-21. A reference page, corrected in place — not a dated post.*