What are prediction markets?

At their core, prediction markets are designed to answer a simple question: How likely is a particular event to happen?

Instead of relying on pundits, headlines, or single forecasts, prediction markets aggregate the views of many participants into a single, continuously updating signal: the market price of an event contract. As people with different information, perspectives, and beliefs interact, prices adjust to reflect the balance of those views. Over time, those prices can offer insight into how likely the market believes an event is to occur—or not.

Prediction markets aren’t new. They’ve been around for decades and used in fields ranging from economics and politics, to business forecasting. What’s changed is accessibility. Today, individuals can more easily engage with these markets directly through apps like Robinhood across topics like sports, entertainment, economic data, and technology milestones, among others.

At a high level, prediction markets work by turning uncertainty into prices. Instead of asking people to explain what they think will happen, prediction markets let them show that belief by buying and selling event contracts tied to simple Yes or No outcomes. The price of a contract reflects how likely the market believes that outcome is at that moment.

Before an event is decided, contracts typically trade at prices between $0.01 and $0.99. A higher price means the outcome is considered more likely, while a lower price means it’s seen as less likely. As new information comes in—news, data releases, injuries, or other developments—people update their views, and prices move to reflect those changes. When the event is officially resolved, trading stops and the contract settles. If the outcome occurs as defined, the contract settles at $1. If not, it settles at $0.

Once trading enters the picture, the price you pay for an event contract becomes directly linked to your profit and loss. When you enter a position, when you exit, and what price you pay all matter. Additionally, payout at settlement and profit/loss are not the same thing. This is where many early misunderstandings arise, and where educating yourself before trading can be helpful.

The important thing to understand is that prices move before events are decided. Prediction markets don’t wait for certainty. They constantly adjust as expectations change. That’s why simply watching how prices move can be useful on its own, even if you never place a trade.

While prediction markets may feel simple on the surface, trading them can be more nuanced. Participants aren’t limited to holding a contract until an event is resolved. They can trade contracts as prices move and expectations change. That flexibility is a core feature of prediction markets and shapes how prices, risk, and outcomes interact.

A few broad principles apply across all prediction markets:

• Prices move based on expectations
• Liquidity isn’t guaranteed
• Entry price, position size, and timing all matter
• Many of the skills used in traditional trading including risk management, patience, discipline, and understanding market structure, carry over

It’s also important to recognize that not all prediction markets behave the same way. A highly liquid sports contract often trades differently from a thinly traded climate contract. Political events carry different timing and resolution risks than economic data releases. Each category has its own rhythm, liquidity profile, and sources of uncertainty, so context matters.

Because prediction markets involve uncertain outcomes, they’re sometimes compared to gambling. However, there are key differences.

Traditional gambling typically involves fixed odds and one-time wagers placed against a house, which takes the other side of the bet. Once a wager is placed, the terms generally don’t change, and the bettor’s role is largely passive—the outcome alone determines the result. Even where modern sportsbooks offer features like cash-out or live adjustments, the core structure remains house-based.

Prediction markets work differently. Participants trade with other market participants on an exchange, much like in traditional financial markets. Prices move as expectations change, and positions can be entered, adjusted, or exited over time. The focus shifts from placing a single wager to engaging with a market that continuously reflects collective beliefs.

Behind the scenes, prediction markets are supported by a clear structure. Exchanges, brokers, market participants, regulators, and data sources each play distinct roles. Knowing who does what helps explain why prices behave the way they do, why liquidity can change, and how outcomes are ultimately settled.

That doesn’t make prediction markets risk-free. Losses are certainly possible, liquidity can vary, and execution matters to your bottom line. But the mechanics—and the mindset—are fundamentally different.

Prediction markets continue to expand in size, scope, and participation. New events are added regularly across a wide range of categories, reflecting real-world developments as they unfold.

Some contracts are short-term and resolve quickly. Others play out over weeks, months, or longer. Some attract heavy participation and tight pricing while others trade more quietly. This diversity is part of what makes prediction markets interesting and useful, but it also means context matters.

Ultimately, not every market behaves the same way.

Prediction markets deal explicitly with uncertainty, which means risk is always present. Outcomes are never guaranteed, and contracts can lose value or expire worthless depending on how events unfold. Because of this, thoughtful participation and risk management is critical. Understanding what a contract represents, how prices work, and what could go wrong is critical. For some people, prediction markets may not be a good fit, and that’s okay. Learning how they work can be valuable on its own, even without ever placing a trade.

Prediction markets are tools for expressing and observing collective expectations about future events. They translate uncertainty into tradable prices, offering a real-time view of how likely the market believes something is to happen.

They’re not about certainty, guarantees, or shortcuts. They’re about probabilities, judgment, and discipline. Understanding that distinction is the first step toward engaging with prediction markets thoughtfully, and deciding if and where they fit in your broader investing and trading strategy.

Continue learning about event contracts in the next article.

If you have account-specific questions or need help related to prediction markets, event contracts, or Robinhood policies, please visit the Robinhood Help Center or reach out to our support teams from within the app.