How Do Prediction Markets Work? A Step-by-Step Explainer
Prediction markets look intimidating from the outside — order books, YES/NO shares, resolution rules — but the mechanics are surprisingly simple once you see them in action. This explainer walks through exactly what happens from the moment a market is created to the moment payouts hit your account.
The Contract
Every market starts with a contract: a question with a clear resolution rule. 'Will the Federal Reserve cut rates at the December FOMC meeting?' A YES share pays $1 if the answer turns out to be yes; a NO share pays $1 if the answer turns out to be no. Only one side pays.
The resolution rule specifies exactly how the platform will decide the outcome — usually pointing to a specific press release, an official filing, a scoreboard, or an exchange close. Reading it before you trade is non-negotiable.
The Order Book
Trading happens on an order book, just like a stock exchange. Buyers post bids ('I will buy YES at 0.60'), sellers post asks ('I will sell YES at 0.62'). When a bid and ask cross, a trade executes and the price updates.
That trade price is the market's current probability estimate. A YES trading at 0.60 means the crowd, weighted by dollars, believes the event has a 60% chance of happening right now.
Settlement
Once the underlying event happens, the platform reads the resolution source and settles the market. Winning shares pay $1 each and appear in your balance; losing shares go to zero. From there you can redeploy your capital into another market or withdraw.