How prediction markets work: prices, contracts, and settlement
A prediction market is an exchange where you trade contracts on yes/no questions. Examples: "Will the Fed cut rates in December?" or "Will Team A win on Sunday?"
Each contract pays a fixed amount if the answer turns out to be yes, and nothing if it does not. In the US, platforms such as Kalshi and Polymarket US operate as CFTC-regulated exchanges.
The $1 contract
Kalshi describes it simply: "Each contract on Kalshi settles to $1 if your answer is right, and $0 otherwise."
Every market has two sides:
- A Yes contract pays $1 if the event happens.
- A No contract pays $1 if it does not.
Prices run from $0.01 to $0.99. A Yes at 60¢ and a No at 40¢ add up to $1. When those two orders match, the exchange holds the full dollar until the market settles.
Price as probability
Because a contract pays $1, its price reads like a probability. Kalshi notes that "prices on Kalshi have a very natural interpretation as probabilities": a contract at 40¢ suggests the market sees roughly a 40% chance.
That is the crowd's current estimate, not a forecast you can rely on. Prices move as news arrives and as traders change their minds.
A worked $1 contract example
You think a market priced at 62¢ for Yes is too low, and you buy one Yes contract.
- Cost: $0.62
- Taker fee on Kalshi: 0.07 × 0.62 × 0.38 ≈ $0.0165
- If Yes: you receive $1.00. Net gain ≈ $1.00 − $0.62 − $0.0165 = $0.36
- If No: the contract pays $0. Net loss = $0.6365, which is everything you paid
Now scale it up to 10 contracts at 40¢:
| Outcome | You paid | You receive | Fee (Kalshi taker) | Net |
|---|---|---|---|---|
| Yes wins | $4.00 | $10.00 | $0.168 | +$5.83 |
| No wins | $4.00 | $0.00 | $0.168 | −$4.17 |
| You sell early at 55¢ | $4.00 | $5.50 | $0.168 + $0.173 | +$1.16 |
You do not have to hold until the end. You can sell your contracts back into the market at the current price, which locks in a gain or cuts a loss. Each trade pays its own fee.
Fees
Kalshi and Polymarket US both charge a taker fee shaped like rate × contracts × price × (1 − price).
- Kalshi: 0.07
- Polymarket US: 0.0695 on standard markets
Fees are highest near 50¢ and small near 1¢ or 99¢. Neither platform takes a percentage of winnings at settlement. The details are in our Kalshi fees and Polymarket fees guides.
Order books, makers and takers
Prices come from an order book. Buyers post bids and sellers post asks.
- If you place an order that fills right away, you are a taker.
- If your order waits on the book until someone fills it, you are a maker.
Makers usually pay lower fees or none.
The gap between the best bid and the best ask is the spread. In thin markets, the spread can cost more than the fee. CME's disclosure for event contracts warns that limited liquidity "could make it difficult" to enter or exit at intended prices.
Settlement
When the event is decided, the market settles.
Kalshi pays $1 per winning contract. Its documentation says markets "typically settle shortly after expiration," though timing varies with the data source and any manual review.
Polymarket.com (international) resolves markets through the UMA Optimistic Oracle:
- Someone proposes an outcome and posts a bond.
- A 2-hour challenge window follows, and disputes can escalate to a vote.
- Winning tokens then redeem for $1.00 and losing tokens become worthless.
Polymarket US is a separately regulated exchange with its own rulebook.
Each market's rules name the source used to decide it, for example an official statistic or a league result. Read them before trading, because the exact wording decides edge cases.
The same market on different platforms
The same question often trades on more than one exchange, at different prices. A Yes might sit at 52¢ on one platform and 55¢ on another.
Comparing venues before you buy is the simplest way to cut costs. Our live comparison does that for markets listed on both Kalshi and Polymarket.
Who can trade
US platforms require users to be 18 or older. Some states require more, and some restrict certain contract types, especially sports. Check availability in your state first.
The most you can lose on a bought contract is what you paid for it. That is still a real loss, so size positions accordingly.
FAQ
What does a 70 cent price mean?
It means the market is pricing roughly a 70% chance that the answer is yes. If you buy Yes at 70 cents and it happens, you receive $1. If not, you receive nothing.
Can I lose more than I put in?
Not when you buy a contract. Your maximum loss is the price you paid plus fees. The contract can expire worth $0.
Do I have to wait until the event ends?
No. You can sell your contracts at the current market price at any time before settlement, if there is a buyer. Each sale is a new trade and may carry a fee.
Who decides the outcome?
Each market names its resolution source in its rules. Kalshi settles against that source. Polymarket.com uses the UMA Optimistic Oracle with a challenge period.