Prediction markets let people trade contracts that pay out based on the result of a future event. Prices behave like live, crowd-updated probability signals—useful, but not guarantees.
The Core Idea (TL;DR)
- If a $1 payout contract trades at $0.63, the market is implying ~63% probability (before fees/frictions).
- Prices update as traders act on information, models, or news.
- Profit flows to those who correct mispricing—information meets incentive.
What People Actually Trade
- Binary contracts: Yes (event happens) or No (event does not).
You buy if you think the implied probability is too low, or sell if you think it’s too high. - Other formats exist (multi-outcome, ranges), but binary is the starter pattern.
Why They Exist
- Aggregate dispersed information into a single price signal.
- Reward faster interpretation, better data, or better models.
- Surface a clear, trackable probability as events unfold.
What Prediction Markets Are Not
- Not a poll; not an expert forecast.
- They are a financial mechanism where incentives reward being right, not loud.
Quick Checks Before You Trust a Price
- Liquidity: Is size available without huge slippage?
- Resolution clarity: Is the question unambiguous?
- Spreads/fees: Are they eating the edge?
- Event type: Is it hard to game or manipulate?
Key Takeaways
- Prices are probabilistic signals—helpful, never certain.
- You trade outcome-linked contracts; resolution rules matter.
- Incentives push prices toward accuracy, but only when liquidity and clarity exist.