With their sudden rise in popularity, you may be wondering how to trade and how prediction markets work. This beginner's guide to prediction markets will help answer that question and introduce some basic concepts in trading event contracts. Some of the top prediction market apps like Kalshi, Polymarket, DraftKings Predictions, FanDuel Predicts and Fanatics Markets are already generating billions in trading volume, and other apps have recently been licensed by the Commodity Futures Trading Commission (CFTC) to offer sports prediction markets.
What happens when you place a trade?
Prediction market apps are event contract exchanges. So, how do prediction markets work? It starts with understanding executing trades.
When you place a trade, you're purchasing an event contract tied to a specific outcome. For example, if you're trading on a baseball game, an event contract will offer a specific outcome like "New York to win" with Yes and No options at a designated price.
You purchase whichever option you'd like, and once the event you're trading is over, your position resolves as either a success or failure. Successfully resolved event contracts pay out real money. Failed event contracts resolve with a 100% loss.
This is the basic concept in understanding how to trade. Let's get into the details now.
Reading the price
Pricing format can vary from platform to platform, but two of the most well-known players in the prediction market space (Kalshi and Polymarket) both use a per-contract pricing format that keeps things pretty simple.
Yes contracts
Let's use the example event contract of "New York to win," and let's say Yes is priced at $0.60 per event contract.
- You buy 100 Yes contracts on "New York to win".
- At $0.60 per contract, the total cost is $60.
- If New York wins, you are paid out in real money at $1 per contract.
- That's a $100 payout for 100 Yes contracts.
- At a $60 original cost, that equals a $40 profit.
No contracts
Let's use the same example event contract of "New York to win," and let's say No is priced at $0.40 per event contract.
- You buy 100 No contracts on "New York to win".
- At $0.40 per contract, the total cost is $40.
- If New York loses, you are paid out in real money at $1 per contract.
- That's a $100 payout for 100 Yes contracts.
- At a $40 original cost, that equals a $60 profit.
Contract pricing is connected to implied probability, meaning that in this example the pricing generated by public interest in this exchange suggests that New York has a 60% chance to win, and a 40% chance to lose.
To be clear, this is not financial advice on how to trade. We recommend always doing your own research before trading.
Prediction market pricing formats
Prediction markets allow you to choose your preferred format for viewing prices in your account settings. Let's use the example of NFL prediction markets priced at a 50-50 probability of happening. Available price formats include:
- $0.50 (per event contract)
- 50% (implied probability)
- +100 (to be paid out $100 in profit per $100 in event contracts purchased, for a total of $200)
All of these price formats mean the same price, just displayed in different ways. Let's offer another example of a market priced as more likely than not to happen. If you're trading an outcome priced at -150, it means:
- $0.60 (per event contract)
- 60% (implied probability)
- A $150 trade is required to earn a $100 profit ($250 total payout) if the market resolves in your favor.
Lastly, let's show an example of a market priced as less likely than not to happen. A trade priced at +170 means:
- $0.37 (per event contract)
- 37% (implied probability)
- A $100 trade that resolved in your favor would yield a $175 profit ($275 total payout).
Again, prediction markets allow you to choose your preferred pricing format in your account settings.
Placing your first trade
If you're wondering how prediction markets work, they follow relatively similar formats for placing trades. Before your first trade, each app/site must collect information to confirm your identity before allowing you to use contract exchanges.
Steps for how to sign up on a prediction market app
Many platforms offer eligible new users prediction market promos for signing up and making a qualifying first deposit or trade.
- Consider tapping a CLAIM BONUS button on this page to begin the sign-up process in order to unlock the best available prediction market bonus.
- Since platform availability and offer eligibility vary by state, make sure to read the terms and conditions of each offer to choose the best option for you before you deposit.
- After choosing a platform, either download the app or go to the website to create a new account and profile.
- Verify your identity by providing your name, address, birthdate to confirm you meet the minimum age and social security number (some platforms may require additional information). You may also be asked to fill out a questionnaire required by the CFTC.
- Fund your account by using any of the platform's deposit methods (some deposit methods on prediction market platforms add fees).
- Browse the platform, and always do your own research before trading.
- For withdrawals, select an available banking option and choose how much you'd like to transfer (minimums and maximums may apply).
For more specific step-by-step instructions on how to sign up for prediction markets, be sure to check out our app-specific guides, like our Kalshi promo code review, our Polymarket promo code review, and our DraftKings Predictions promo code review.
Selling before settlement
While many traders choose to wait until a contract is settled to see if their trade resolves successfully or not, you can also exit a position on prediction markets by selling your contracts before settlement.
If you were to execute a trade that Chicago is going to win a championship in pro football before the season, the price is likely to fluctuate throughout the season based on weekly game results or injury news. Here's a hypothetical example:
- You pay $0.04 per event contract before the season.
- Chicago wins its first four games.
- Chicago is now priced at $0.08 per event contract.
- You can either hold the contracts that you bought at $0.04 each or sell them at $0.08 per contract to take a 100% profit, while eliminating your risk.
However, if Chicago does eventually go on to win the championship, those event contracts would pay out at $1.00 each, for a profit of $0.96 per contract.
You can use these real-time prediction market exchanges to trade short-term or longer-term, like for a season, depending on your risk tolerance. Naturally, shorter-term contracts often carry less risk.
For many new users wondering how to trade prediction markets, it may be a common misconception that you have to hold on to positions until a market fully settles.
How are prediction markets regulated in the U.S.?
The CFTC is a federal government agency established in 1975 to regulate U.S. derivatives, futures, and option markets. In 2000, Designated Contract Markets were established in their own statutory category under Section 5 of the Commodity Exchange Act. Now, these DCMs are officially regulated by the CFTC, and the recent boom of prediction markets designated as DCMs has become a core element of their federal oversight agenda.
CFTC-licensed DCMs are all federally legal, but some state agencies and regulators have recently filed legal challenges. Sports event contracts are a large part of prediction market trading volume, and some states have claimed that sports event contracts violate their state sports betting laws.
Lawsuits have been filed challenging sports prediction markets in well over a dozen states, and the CFTC has countersued in many instances. Amidst these federal vs. state battles, sports event contracts remain available in some states but not others. Contract category availability also varies by platform. It is truly a case-by-case basis. Texas is one state where sports event contracts currently remain available amid the broader legal uncertainty.
Major players in the industry like Kalshi and Polymarket have also sought preliminary injunctions to halt attempts that would stop them from being able to offer sports event contracts in some states.
It's all complicated and changing rapidly, but our guide to prediction market legal states can take you through it.
Ultimately, the CFTC-licensed prediction markets are legal at the federal level and are still operational in most states. The CFTC has not challenged sports prediction markets. The federal stance under the current administration has been consistent that these are legal event contract exchanges.
Prediction markets vs. traditional investing
The nature of prediction market event contracts and traditional investing assets and how value is created are quite different.
With traditional investing in stocks/ETFs, you're hoping for economic growth over time, and the value of those assets is often impacted by earnings, dividends and a variety of other market factors.
However, the value of a contract is defined entirely by whether or not an event occurs at prediction markets.
Traditional investing certainly has its own volatility concerns, but the zero-sum nature of prediction markets makes them significantly more volatile. They're highly speculative and fast-paced, so an additional level of caution is required to trade responsibly.
Overall, prediction markets should be used for entertainment purposes in a fun, responsible manner. Event contracts are not suitable for all investors. 100% loss can occur. Past performance is not indicative of future results.
Responsible trading resources
If you or someone you know has a trading problem, additional help and resources are available through the NCPG's Financial Trader Health and Safety Initiative. You can also call or text 1-800-MY-RESET.
When learning how to trade on prediction markets, always remember that Responsible Trading Toolkits are available on most platforms and may include:
- Deposit Limits
- Session Time Limit
- Timeout
- Self-Exclusion
- Close Your Account
- Contact Helplines
To activate any of these, navigate to your account settings or ask for help from the operator via customer support.
Common pitfalls of prediction markets
There are several important things to know when learning how to trade responsibly.
Potential for 100% loss
Because these event contracts are binary (Yes/No outcomes), you have to be aware of the reality that your contracts incur a 100% loss if they settle with an event outcome opposite of your position.
Liquidity issues/slippage
There are also sometimes liquidity issues in smaller markets that will cap your ability to trade at the desired price, and that may also siphon off some of the perceived value through slippage (the difference between the expected price of the trade and the actual price of the trade when executed).
The price you are seeking may be worse if you are wanting to buy a large number of contracts; however, prediction market platforms will always show you your price per event contract before you confirm the transaction.
Insider trading
Insider trading is also an issue you have to be aware of before leaving this prediction market tutorial.
It's possible that some information-based markets can be exploited by people who have information that's not public.
Prediction market platforms can flag irregular trading to the CFTC for potential prosecution. However, not everybody is caught, and it can impact trading in markets where some people might have access to the information before it's publicized.
Live trading on site/courtsiding
Similarly, well-funded traders have the ability to flood markets during events while in attendance at those events. If that event is broadcast, live-streamed, or disseminated via data feeds, those buying live event contracts offsite/at home are doing so 60 seconds or more after on-location traders have already flooded the market.
This is known among traders as courtsiding. Before deciding on how to trade live events, it's critical to remember that at home, what you are seeing on a screen is behind other traders.
Legal challenges
There are also challenges by state regulators and Attorneys General that appear to be hurdling towards the Supreme Court of the United States.
Because of the many legal challenges to prediction markets (particularly sports prediction markets), the highest court in the land may have to eventually weigh in on whether this should be regulated at the state level or federally.
This led to restrictions on trading capability under some market categories depending on the state. Sports, entertainment and election contracts on Kalshi and Polymarket are both unavailable in NV and sports contracts on Kalshi are currently unavailable in MI.
Prediction market terms to know
Learning how to trade also means learning what specific words and phrases used on platforms mean. Here are some of the most used terms.
- Market: A public exchange for a specifically defined event with clear outcomes.
- Event contract: An often binary (yes/no) position for purchase that pays a fixed amount if your desired outcome occurs (typically $1 per contract) and $0 if it doesn't.
- Price: The current market value of an event contract (typically tied to the implied probability set by public interest on each outcome of the market).
- Implied probability: The percentage chance of the desired outcome (often represented as a percentage or price per event contract).
- Volume: The total number of dollars being traded within a given market.
- Liquidity: The amount of money and volume of resting orders available in a market for buying and selling event outcome shares.
- Slippage: The difference between the expected price and the actual price of a trade, caused by buying more contracts than are available at a listed price.
- Settlement: The process of closing out a market and giving payouts to users who own correctly predicted event contracts.
- Resolution source: The specific data feed, official record or authority used to determine and verify the outcome of an event contract.
- Bid price: The highest price a buyer is willing to pay for an event contract.
- Ask price: The lowest price a seller is willing to accept for event contracts.
- Payout: The amount of money awarded to traders who own successful contracts.
- Expiration: The date/time when trading is halted, an event is resolved or a bid/ask offer ends.
Prediction market FAQs
Do I need to verify my identity before I can start trading?
Yes, CFTC-regulated DCMs will require you to verify your identity before you can trade any event contracts.
Can I trade prediction markets from a mobile app?
Yes, most prediction market platforms are specifically designed for use through a mobile app, though many still offer desktop sites for trading too. Check with the respective platform you're interested in for details on where to download their app.
What happens if an event is postponed or the outcome becomes unclear?
Market rules may vary based on the event and the platform, but typically they'll either remain open until they're rescheduled, voided/refunded at a 50-50 split or settled at the last fair market price. Check the specific Market terms of any prospective trades before executing.
Do I have to pay taxes on money made from trading?
Yes, prediction market earnings are taxable in the United States. However, the IRS hasn't provided specific guidelines on how prediction market income is classified yet. This information is provided for general informational purposes only and does not constitute tax, legal, or financial advice. If users have any questions regarding taxes on gambling winnings, they should consult with a tax professional for advice.
Is there a minimum amount needed to open a prediction market account?
That depends on the specific platform you're using. For example, Kalshi requires a $10 minimum deposit. As for buying event contracts, some are available for as little as $0.01 per contract. That, however, implies a 1% likelihood in the market that the contract settles successfully.
Is there a minimum age needed to open a prediction market account?
The minimum age to participate on most platforms is 18+, but some prediction market apps may require you to be 21+.
Prediction markets should be used for entertainment purposes in a fun, responsible manner. Event contract trading involves a risk of substantial loss and is not suitable for all investors. 100% loss can occur. Past performance is not indicative of future results. Participation in prediction markets is subject to applicable eligibility requirements. Participation may be restricted or prohibited in certain jurisdictions and participants are responsible for ensuring their participation complies with applicable laws and regulations in their jurisdiction. Prediction markets content is not intended for individuals located in jurisdictions where they are prohibited. Additional help and resources are available through the NCPG's Financial Trader Health and Safety Initiative. You can also call or text 1-800-MY-RESET.
