Question of the Day - 01 November 2025

In yesterday's QoD, we explored the history of prediction markets and their legality in the U.S. Today, we explain how you make a bet on these platforms. 

The choices are generally binary: "yes" and "no" contracts. Yes contracts rise and no contracts drop in price as an event becomes more likely. Contracts typically pay $1 if the event occurs and $0 if it doesn't, making the contract price a real-time indicator of the market's collective prediction. Participants profit if they correctly predict the outcome (i.e., sell a contract at a higher price than they bought it for or receive $1 at settlement) and lose money if they're wrong. 

As such, prediction markets harness the intelligence of numerous participants, often providing more accurate forecasts than traditional polls or individual expert opinions. After all, the contract buyers and sellers are financially motivated to be truthful in their predictions in order to generate a profit, creating a put-your-money-where-your-mouth-is system.

The trades, typically, concern election outcomes; economic markets; such as predicting future indicators like inflation, unemployment rates, and interest rate changes; and now sports betting. Our understanding is, now that prediction markets have entered the sports betting arena, a majority of the contracts are traded over sports futures.

Here's an example of a sports trade.  

A market is created on the odds that the Kansas City Chiefs will win the Super Bowl. The yes-no contract puts it thusly, "Will the Kansas City Chiefs win the Super Bowl?" 

When the contract opens for trading early in the season, the price is based on public sentiment. Let's say the market prices a Yes contract at $0.25 (meaning a 25% perceived chance that the Chiefs will win the Super Bowl) and a No contract at $0.75 (a 75% chance that they won't). You believe the Chiefs are undervalued and have a better-than-25% chance of winning, so you buy 100 Yes contracts for a total of $25.

Several weeks into the season, the Chiefs go on a losing streak. The perceived probability of their winning the Super Bowl drops. So the price of a Yes contract falls to 17 cents. The No contract rises in price.

Taking advantage of the dip, you buy low and pick up another 100 Yes contracts for $17. Your average purchase price is now 21 cents per contract.

Late in the season, the Chiefs are on a winning streak and the price of a Yes contract climbs to 40 cents. You believe this price is inflated and lock in some profits before the Super Bowl by selling 50 of your contracts for $0.40 each, earning $20. You now have 150 contracts remaining, at an average price of around 14 cents.

When the Chiefs win the Super Bowl, the prediction market pays you $1 for each of your 150 winning contracts, for a total payout of $150. 

So how'd you do? 

You invested $42 ($25 + $17). When you sold back $20 worth of contracts, your net investment was $22 ($42 - $20). After receiving your $150 payout, your total profit was $128 ($150 - $22).

Good work!

There are commissions involved with each trade, which is how the operators of the market, or exchange, make their profit. But commissions can be as low as 1%-2%, making this a better deal than the standard 11/10 sports book arrangement and one of the selling points being used to draw market share from the sports books.