# What is a prediction market? A beginner's guide

URL: https://tomorrowalpha.com/learn/what-is-a-prediction-market
Updated: 2026-10-12

A prediction market (also called a predictive market or event market) is an exchange where people buy and sell contracts that pay $1 if a future event happens and $0 if it doesn't. The trading price — say 62¢ — is read as the crowd's estimate of probability, here 62%. Kalshi and Polymarket are the largest examples.

## At a glance

- **Also called:** Predictive market, event market, information market, event-contract exchange
- **Payout:** $1 if YES resolves, $0 if not
- **Price = probability:** 62¢ ≈ 62% chance
- **Largest platforms:** Kalshi, Polymarket (real money); Manifold (play money)
- **Market size:** Tens of billions of dollars a month in 2026

## How does a prediction market work?

Every market is a yes/no question with clear resolution rules — for example *'Will the Fed cut rates at its December 2026 meeting?'*. You can buy **YES** or **NO** shares. Each share pays $1 if your side wins.

**Worked example:** YES trades at 30¢. You buy 100 YES shares for $30. If the Fed cuts, you receive $100 (a $70 profit before fees). If it doesn't, the shares expire worthless. You can also sell before resolution if the price moves — at 55¢ your position would be worth $55.

Prices move because traders with new information buy or sell. That is why a liquid market's price is a running, money-weighted forecast.

## Prediction market vs predictive market — is there a difference?

No. 'Predictive market' is a common synonym. You will also see 'event contracts' (the regulatory term in the US), 'information markets' (academic), and 'betting exchanges' (the UK legal term for the same peer-to-peer mechanism). Don't confuse them with **predictive market research** or **predictive analytics**, which use statistical models rather than traders to forecast.

## Examples of prediction markets

| Platform | Money | Regulation | Known for |
| --- | --- | --- | --- |
| Kalshi | USD | CFTC (US) | Largest by volume; sports, Fed, CPI |
| Polymarket | USDC / USD | CFTC for Polymarket US | Global politics, geopolitics, crypto |
| Manifold Markets | Play money (Mana) | Not required | Any question, user-created |
| Smarkets, Betfair Exchange | GBP/EUR | UK Gambling Commission | UK betting exchanges |
| Iowa Electronic Markets | USD (small stakes) | Academic (CFTC no-action) | Research since 1988 |

## Are prediction markets accurate?

Liquid prediction markets are among the best-calibrated public forecasts available: events priced at 70% tend to happen about 70% of the time. Research going back to the Iowa Electronic Markets found they often beat polls and expert panels. They are weaker when markets are thin, when the question is ambiguous, or when a few large traders move prices — always check volume before trusting a number.

## Who uses prediction markets?

- **Traders** expressing a view on politics, sport, crypto or AI.
- **Hedgers** — businesses offsetting exposure to rates, weather or elections.
- **Journalists and analysts** citing real-time odds as a sentiment gauge.
- **Researchers and policymakers** using markets as a forecasting benchmark.

## Prediction markets vs sports betting

A sportsbook sets odds and takes the other side of your bet. A prediction market is **peer-to-peer**: you trade against other users, the exchange earns a fee, and you can exit before the event. Legally, the line is contested — the US CFTC treats exchange-listed event contracts as derivatives, while most European regulators treat them as gambling.

## Risks to know before you start

- You can lose your entire stake on any contract.
- Resolution wording matters: read exactly what counts as YES.
- Thin markets have wide spreads and unreliable prices.
- Legality depends on where you are — see our [country guide](https://tomorrowalpha.com/legal).
- Crypto platforms add wallet and stablecoin risk.

## How to get started (for beginners)

- Check that a platform is legal where you live: [legal by country](https://tomorrowalpha.com/legal).
- Practise free on [Manifold Markets](https://tomorrowalpha.com/learn/manifold-markets).
- Compare platforms: [Kalshi vs Polymarket](https://tomorrowalpha.com/compare/polymarket-vs-kalshi).
- Watch live odds on [TomorrowAlpha markets](https://tomorrowalpha.com/markets) to learn how prices react to news.

## Frequently asked questions

### What is a predictive market?

A predictive market is another name for a prediction market: an exchange where contracts on future events trade between 0 and 100 cents, so the price reflects the crowd's probability that the event happens.

### How do prediction markets make money?

Exchanges charge trading fees, typically largest when a contract trades near 50¢ (about $1.75 per 100 contracts on Kalshi). Traders profit by buying contracts below their true probability.

### Are prediction markets gambling?

It depends on the jurisdiction. In the US, CFTC-regulated event contracts are derivatives; in the UK and most of the EU, regulators classify them as gambling that needs a licence.

### What is the biggest prediction market?

Kalshi, with roughly 78% of tracked volume in September 2026, followed by Polymarket's US and international exchanges.

### Are prediction markets legal?

Yes in the US on regulated exchanges such as Kalshi and Polymarket US; restricted or blocked in the UK, most of the EU, Switzerland, India, Australia and Brazil.

## Sources

1. [CFTC — designated contract markets](https://www.cftc.gov/IndustryOversight/IndustryFilings/TradingOrganizations)
2. [Pew Research — prediction-market volume (Sept 2026)](https://www.pewresearch.org/short-reads/2026/09/23/prediction-markets-trading-volume-doubled-between-may-and-july-largely-driven-by-sports/)
3. [Iowa Electronic Markets](https://iemweb.biz.uiowa.edu/)