An Introduction to Prediction Markets and How They Work
Prediction trading is a peer-to-peer process where you buy and sell “yes” or “no” trade contracts relating to different propositions, such as “What will the price of gold be at the end of the year?” Trade contracts have a payout value of $1 each, but you can typically buy or sell trade contracts for less than this based on the shifting markets.
The Costs of Event Trading Explained
If you want more information on prediction markets, you can look at our other guides like
how to read market prices. Here, though, we are concentrating on the costs of event trading - the fees that operators charge for facilitating your trades. Below we look at the common types of fees, and show you an example of how this translates to your prediction market experience.
Types of Prediction Trading Fees
From our experience, there are typically three types of fees charged at different stages of a prediction market transaction:
- Initial trade contract purchasing fee.
- Trade contract selling fee.
- Fee upon trade contract payout.
Firstly, there might be an initial fee when you purchase trade contracts for a yes or no answer on a proposition. For example, there could be a 1.00% fee for all trade contract purchases, meaning that if you purchased 1000x trade contracts at $0.95 each, your trade feel would be (1000*0.95)*0.01 = $9.50.
Next, if you decide to sell your trade contracts before the proposition event occurs, there could be a selling fee. Lastly, if you decide to hold your trade contracts and wait for the event to happen or not happen, there is usually a fee taken off of the $1 payout you get for each trade contract.
The prediction market site that you use should have a clear breakdown of its fees so that you can add them into your calculations and easily understand exactly what you are getting in return.
An Example of Trading Fees in Action
Let’s now look at an example so you can see the potential fees in action and how this can impact your overall budget and value of your trade contracts. We have a theoretical prediction market site that has the following fees:
| Trade Contract purchase fee |
0.50% |
| Trade Contract payout fee |
1.50% |
| Trade Contract Payout |
$1 each |
You purchase 1,000 “yes” trade contracts for NVIDIA for the prediction market, “What will the largest company be at the end of 2025?”. You decide to hold your trade contracts, and at the end of 2025, NVIDIA is indeed the largest company. Based on the above fee structure, your actual take away would be as follows:
- Initial purchase price for 1,000 contracts at $0.95 each: 1,000*$0.95 = $950.
- Initial purchase fee = $950*0.005 = $4.75
- Total purchase price = $954.75
So, you’ve purchased 1,000 trade contracts at a total investment of $954.75. You hold, get the prediction right, and get a $1 payout per trade contract, minus fees
- Payout for 1,000 correct trade contracts = $1,000.
- Trade contract payout fee = $1,000*0.015 = $15.00.
- Total payout value = ($1,000 - $15) $985.
This means that you bought the trade contracts for $954.75, and got $985 in return, meaning you increased your balance by $30.25. This should show you the theoretical costs of event trading and how this can impact your overall end balance after trading. Please note that these are just theoretical examples and fees - you should check the actual prediction market sites and their fee structures for accurate percentages.
Conclusion - Research the Costs of Event Trading Thoroughly
You should now have a better understanding of the costs of event trading and how this impacts your decision-making process. It’s vital that you research the fee structure beforehand, so that you know exactly what you are paying, and how this affects your final balance. Remember that there can be fees for your trade contract purchases, if you sell your trade contracts, and for your final trade contract payout if you hold.
1.
Event Trading Fee FAQs
💰 Do All Prediction Market Sites Charge Fees?
In most instances, yes. This is because prediction market trading is peer-to-peer, so the operators have to charge a commission to be able to run their sites and make profit.
🚫 Can You Avoid Paying Trading Fees for Your Trade Contracts?
Not if the operator has a fee structure in place. The only thing you can do is research the different providers and look at which operators have the best fee structures.
💵 Are Trade Contracts Always Valued at $1 Each for a Payout?
In most instances, yes. However, some operators do offer $10 trade contracts for those who want to purchase substantially larger amounts, and where there is more market movement to facilitate the larger transactions.
⚖️ Are These Prediction Market Sites Legal?
For guidance on responsible trading and risk awareness, the following free official resources are available:
To make sure you get accurate and helpful information, this guide has been edited by
Ryan Leaver
as part of our fact-checking process.
Advertiser disclosure
