Prediction Markets Explained: How an Event Contract Works

By Alex Thornton · author of the MIT-licensed teachersbettextbook library · Last reviewed 24 July 2026

No line. No juice. No house on the other side. A prediction market is a stack of resting orders from other people, and the number on the screen is a probability with a dollar sign in front of it. Here is the whole machine.

A prediction market is an exchange where people trade binary event contracts: each contract pays $1 if a stated event happens and $0 if it does not, so its trading price in cents is the market’s implied probability of that event. Kalshi, Polymarket and Betfair are the best-known venues. Nothing on this page is legal or tax advice.

The contract: one dollar or nothing

Strip away the vocabulary and a prediction market trades one object. A contract on a stated outcome, with a payoff of exactly two values:

where:

• $P$ — the contract price, in dollars, $0 < P < 1$ (quoted on Kalshi as a whole number of cents, 1¢ to 99¢).
• $C$ — the number of contracts. Outlay is $C \times P$ dollars, before fees.
• $p$ — the true probability of the event. Unobservable. The whole job is estimating it.

Buy 100 contracts at 62¢ and you have spent $62 for something that pays $100 or $0. That is it. No stake-to-win table, no American odds, no parlay ladder — one price, one binary payoff.

Why the price is a probability

A risk-neutral trader pays exactly the expected payoff. Expected payoff is $p \times \$1 + (1-p) \times \$0 = p$ dollars, so the price and the market’s probability estimate are the same number in different units:

That identity is the reason these markets are useful even if you never trade one. A sportsbook price has to be de-vigged before it means anything, because the two sides sum past 100%. A single exchange price sums to 100% by construction — YES at 62¢ and NO at 38¢ are the same claim, seen from each end. A two-sided quote does not: the exchange’s analogue of the overround is not baked into the price, it is the spread you cross, and it is posted where you can read it. On a book quoted 49 bid / 51 ask, taking YES at the 51¢ ask and NO at its own 51¢ ask costs 102¢ for a $1 payoff — a 2% two-sided sum, arrived at visibly rather than silently.

An order book, not a posted line

The structural difference from a sportsbook is who is on the other side of you. A book is your counterparty: it writes the price, holds the opposite position, and pads both sides so it profits on balanced action. An exchange holds no position ever. It publishes two stacks of resting orders — bids (what buyers will pay) and asks (what sellers will take) — matches a YES against a NO, and charges a fee either way.

Two roles fall out of that. A maker rests an order and waits to be filled. A taker crosses the book and trades now, at the posted price. The taker pays for immediacy; the maker gets paid for supplying it. There is no equivalent choice at a sportsbook, where every bet is a take.

Three consequences worth spelling out:

• The cost is explicit. A book’s margin is hidden inside the price. An exchange charges a stated fee and shows you the spread you are crossing. Both are costs; only one is itemised.
• Depth is visible. A posted line tells you nothing about how much money stands behind it. An order book tells you exactly how many contracts sit at each price — and therefore how far your own order will move it.
• Winning accounts aren’t a liability. A book’s profit depends on you losing, which is why books limit or ban consistent winners. An exchange earns the same fee whichever side wins.

How a book gets read properly — bid, ask, depth, and why the midpoint is the lazy answer — is its own page.

The venues, and how they differ

“Prediction market” covers three quite different machines. Status below is a snapshot dated 24 July 2026; access rules and fee schedules are set by the venues and change without notice.

Betfair is worth one extra sentence because its quoting convention hides the same object. “Backing at 2.50” and “buying at 40¢” are the same trade: decimal odds $d$ invert to an implied probability, and that probability is the contract price.

Kalshi is the only one of the three that this site ingests. Polymarket and Betfair data sit behind a legal review before anything from them is displayed to US readers, so the numbers on our board come from Kalshi and from licensed sportsbook feeds — never from scraping any venue.

Regulation: what is settled, and what plainly is not

Settled: Kalshi is a designated contract market regulated by the CFTC under the Commodity Exchange Act, with an affiliated clearing organisation. Its contracts are financial instruments listed on a federally regulated exchange, not wagers accepted by a licensed gaming operator. That is a genuinely different legal category from a sportsbook, and it is why a Kalshi account is opened under securities-style identity rules rather than a state gaming licence.

Unsettled, and we are not going to pretend otherwise:

• State gaming law. Several state gaming regulators have taken the position that sports event contracts are wagering under their statutes and have issued orders against exchanges offering them. Exchanges have contested those orders in federal court, arguing that federal commodities regulation preempts state gaming law. Rulings have gone in different directions in different circuits and the question was live litigation as of this review.
• Where you may trade. Availability is venue-set, changes with each ruling, and does not map cleanly onto the states where sports betting is legal. The venue’s own terms are the only current answer.
• Tax treatment. Event-contract proceeds are not obviously the same thing as gambling winnings, and the reporting a venue issues may differ from the W-2G a sportsbook would send. Practitioners disagree. Ask a tax professional about your own situation.

Content farms in this niche state all three of those as though they were resolved. They are not. This page is information about market mechanics, not legal or tax advice, and none of it is a suggestion that you open an account or take any position.

What a trade actually costs

Two costs, and both are computable before you click. The spread you cross — on a 49¢ bid / 51¢ ask, a taker pays 1¢ above the midpoint — and the fee. Kalshi’s published taker fee is:

$P(1-P)$ peaks at a coin flip, so the fee tops out at 1.75¢ per contract at 50¢ and falls toward the tails — the exact inverse of sportsbook vig, which lands heaviest on longshots. Because the fee is charged per trade and settlement is free, a round trip pays it twice while holding to resolution pays it once.

Run it on your own price: the prediction market odds converter turns a contract price into American, decimal, fractional and implied probability, and prints the fee-adjusted break-even beside it.

What a price is not

A prediction-market price is an estimate produced by whoever showed up, weighted by how much money they brought. It is often a very good estimate. It is not an oracle, and two failure modes are measurable.

The tails lean. A 2026 study of more than 300,000 settled Kalshi contracts found prices informative and sharpening toward close — and low-priced contracts winning less often than the fee-adjusted break-even required.^[2] That is the favorite–longshot bias, first measured at racetracks in 1949^[3] and found in essentially every betting pool since.^[4] Our fair-line machinery shades longshots down for exactly this reason; treating an exchange as unbiased is a modelling error with a price tag.

Quiet books lie. A tight-looking spread on a market nobody has touched in three hours is decoration. Postponed games are the sharpest version: the market stays open, the resting orders go stale, and the quote becomes a fossil that still renders like a live price. Every number on this site carries both timestamps — when we computed it and when the venue last moved it — because staleness is the failure no screenshot reveals.

Where to go next

Four directions, depending on what you came for. The cost comparison against a sportsbook, priced apples to apples and honest about when the book is cheaper. How exchange pricing works — bid, ask, depth, and the microprice. Polymarket versus Kalshi on fees, settlement and access. And books versus exchanges for the vig measured across venues.

Sources

1. Kalshi. “Fee Schedule” (July 2026 revision). — the taker/maker formulas, the round-up-to-the-cent rule, and the zero settlement fee.
2. Burgi, C., Deng, W. & Whelan, K. (2026). “Makers and Takers: The Economics of the Kalshi Prediction Market.” GWU Working Paper 2026-001. PDF. — 300k+ settled contracts: informative prices, favorite–longshot bias after fees.
3. Griffith, R. M. (1949). “Odds Adjustments by American Horse-Race Bettors.” American Journal of Psychology 62(2), 290–294.
4. Thaler, R. H. & Ziemba, W. T. (1988). “Anomalies: Parimutuel Betting Markets: Racetracks and Lotteries.” Journal of Economic Perspectives 2(2), 161–174.
5. Wolfers, J. & Zitzewitz, E. (2004). “Prediction Markets.” Journal of Economic Perspectives 18(2), 107–126. — the standard survey of why a contract price reads as a probability.

Every formula here lives on the Formula Sheet for quick reference.