Prediction Markets Glossary & Definitions
To fully grasp how prediction markets operate, it’s important to be familiar with all the key terms. Some of these words might be new, while others may already be familiar.
Understanding each prediction market term will help you make the most of platforms like Kalshi, Polymarket, and others. Let’s explore each keyword in alphabetical order:
A
Arbitrage
The practice of simultaneously buying and selling the same outcome across different platforms (or within the same market) to lock in a guaranteed profit, regardless of the final result.
B
Bankroll
The total amount of capital a trader has specifically set aside and is prepared to risk on market outcomes.
Binary Contract (Yes/No Contract)
A financial instrument that pays out based on a simple, two-choice outcome.
Blockchain
A decentralized, digital ledger that records transactions and contract settlements across a network of computers.
C
Commodity Futures Trading Commission (CFTC)
The primary U.S. federal agency responsible for regulating the derivatives markets, which include futures, options, and—crucially—prediction markets.
Contract (Event Contract)
A tradable financial instrument that represents a specific outcome of a future event.
Contract Price
The current market value at which a specific outcome can be bought or sold.
D
Designated Contract Market (DCM)
A formal legal status granted by the CFTC to a board of trade or exchange, allowing it to offer regulated futures, options, or event contracts to the public.
Derivatives Clearing Organization (DCO)
A specialized entity, regulated by the CFTC, that acts as the “middleman” for every trade on a prediction market. Its primary job is to ensure financial integrity by guaranteeing that when a contract settles, the winners get paid and the losers pay up.
E
Exit/Early Exit
The act of closing out a position before the underlying event has actually occurred or the contract has reached its final settlement.
F
Favorite Long-Shot Bias
An empirical phenomenon where prediction markets (and betting markets) systematically overestimate the probability of unlikely outcomes (“longshots”) and underestimate the probability of highly likely outcomes (“favorites”).
H
Hedging
A risk management strategy where you buy a contract to offset a potential financial loss in your real life or traditional investment portfolio.
Holder
Any individual or entity that currently owns one or more shares of an event contract.
I
Implied Probability
The likelihood of an event occurring as suggested by the current market price of a contract.
Information Finance
A discipline that uses market mechanisms to elicit, aggregate, and distribute high-quality information.
Information Asymmetry
Occurs when one participant (the “informed” trader) possesses non-public, high-quality data that other participants and the market as a whole do not yet have.
K
Kalshi
A federally regulated exchange based in New York that allows users to trade on the outcome of real-world events.
L
Limit Order
An instruction to buy or sell an event contract at a specific price or better.
Liquidity
A measure of how easily and quickly you can buy or sell contracts without causing a significant change in the market price.
Longshot
A contract representing an outcome that the market considers highly unlikely to happen.
M
Maker
A trader who provides liquidity to the market by placing Limit Orders that do not fill immediately.
Market Maker
A specialized trader or entity that provides Liquidity by simultaneously quoting both a buy price (Bid) and a sell price (Ask) for a specific contract.
Manifold Markets
A social prediction market platform that allows users to create and trade on the probability of virtually any future event using a proprietary play-money currency called Mana.
Metaculus
A reputation-based forecasting platform and aggregation engine that focuses on high-precision, data-driven predictions for global events, science, and technology.
N
No Contract
A tradable instrument that pays out if a specific defined event does not happen.
O
On-Chain
Any activity, data, or financial settlement that is recorded and executed directly on a blockchain.
Order Book
A real-time, digital list of all active buy and sell orders for a specific event contract. It serves as the transparent “matching engine” that connects traders with opposing views.
P
Polymarket
A decentralized prediction market platform where users trade on the outcome of real-world events using USDC stablecoins.
PredictIt
A U.S.-based prediction market that allows users to trade on the outcome of political and financial events. Launched in 2014, it is traditionally known as the “stock market for politics.”
Prediction Market
A financial exchange where participants trade contracts based on the outcome of specific future events.
R
Resolution
The formal process of determining the final outcome of a contract and distributing payouts to the winners.
Resolution Date
The official date on which a market’s final outcome is verified and the contract is settled.
S
Settlement
The final financial step of a contract’s lifecycle. It is the actual transfer of funds from the losing side to the winning side once the truth of an event has been officially determined.
Smart Contract
A self-executing digital agreement where the terms of the trade are written directly into lines of computer code on a blockchain.
Spread (Bid–Ask)
The difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept for a contract.
T
Taker
A trader who removes liquidity from the market by placing an order that executes immediately against an existing price on the Order Book.
Token
The digital unit of exchange or the specific asset used to represent a position in a market.
U
USDC
A digital stablecoin that is pegged 1:1 to the U.S. Dollar. In the world of prediction markets, it has become the “universal currency” for decentralized trading.
V
Vig (Vigorish)
The built-in commission or “tax” that a market operator charges for facilitating a trade, also known as “juice” or “the cut.”
W
Wash Trading
A form of market manipulation where a trader (or group of traders) simultaneously buys and sells the same contract to create the artificial appearance of high trading volume and activity.
Whale
A trader who places unusually large contracts, often totaling hundreds of thousands or millions of dollars on a single outcome.
Wisdom of the Crowd
The theory that a large, diverse group of independent individuals can collectively provide more accurate forecasts or decisions than any single expert or small team of specialists.
Y
Yes Contract
A financial instrument that represents a trade on a specific outcome or event occurring as defined. It is the core “building block” of binary trading.
If you’re interested in trading on prediction market platforms, review these terms and visit some of the other resources on our website.