GUIDE · UPDATED 2026-10-17
How Prediction Markets Work: From Order to Settlement in Five Steps
Every trade on a prediction market follows the same five-step life cycle. Understanding it takes ten minutes and explains 90% of the surprises beginners hit — from "why did my fill price move?" to "why did my winning contract settle to zero?".
Step 1: A market is listed with a written resolution rule
Each market starts as a precise question — "Will the Fed cut the federal funds rate at its December meeting?" — plus a resolution source: the exact data or authority that decides YES or NO. Read the rule, not just the title. Ambiguity lives in the fine print, and disputes usually trace back to traders who traded the headline instead of the rule.
Step 2: Traders take YES or NO
You buy a YES contract if you think the event will happen, or a NO contract if you think it won't. Prices run from 1¢ to 99¢. Because YES + NO = $1.00, buying NO at $0.37 is mathematically the same bet as buying YES at $0.63 — most platforms let you do either, and selling an existing contract closes the position early.
Step 3: The order book sets the price
Like a stock exchange, resting orders form the book. Your market order fills against the best available bids and asks, so size moves your average price — the difference between the best bid and best ask is the spread, and thin markets have wide ones. Sellers who quote both sides continuously (market makers) tighten spreads and earn the spread as compensation; that's where a chunk of your effective cost goes on quiet markets.
Step 4: The event happens (or doesn't)
Prices swing with every relevant headline. A 95¢ contract can drop to 60¢ on one press report — which is normal. What matters at the end is only the resolution rule and the designated source: an official tally, a government data release, a league's own statistics feed.
Step 5: Settlement
When the source confirms the outcome, winning contracts pay exactly $1.00 and losing contracts pay $0.00. On centralized venues (Kalshi, Polymarket US) settlement is automatic in your account; on the global Polymarket exchange, outcomes are proposed and affirmed through the UMA optimistic-oracle process, and disputes go to a token-holder vote — a system that has produced controversial resolutions before, which is a real (if rare) risk. Our Polymarket review and Kalshi review cover each settlement process in detail.
Where fees sneak in
- Trading fees: Kalshi charges a taker fee of roughly 0.07 × contracts × price × (1 − price) — at most 1.75¢ per contract at a 50¢ price. The global Polymarket exchange charges none; its regulated US venue uses a slightly smaller version of the same formula.
- Spreads: the hidden cost on quiet markets. A 3¢ spread on a 50¢ contract is a 6% round-trip drag.
- Deposit/withdrawal: card deposits can carry a surcharge (Kalshi lists up to 2%); USD wires and crypto transfers are usually free.
Position limits and payout
Research-exempt venues like PredictIt cap positions at $850 per market. Regulated exchanges don't cap small traders, but individual contracts have finite liquidity. Winnings land as cash (Kalshi, Robinhood) or USDC (Polymarket) — see the fee and payout details in our platform ranking.
Can you sell a contract before the event ends?
Yes — as long as the market is still trading you can exit at the current price, locking in a profit or cutting a loss. That's the practical difference from placing a bet, which usually can't be unwound so easily.What happens if a market resolves controversially?
On oracle-based venues, an initial outcome can be challenged and overturned, which has occasionally flipped payouts days later. CFTC-regulated venues follow a formal rulebook and challenge window instead. Either way, funds are paid strictly per the written rule — not per the crowd's mood.Educational content only — not financial advice. Fee formulas verified against published schedules, October 2026; platforms revise terms periodically.
We compared regulation, fees, custody and market breadth across the big four.