A lay bet is a bet against a selection — you are predicting that it will NOT win. On a betting exchange, you take the role of the bookmaker, offering odds to a backer. If the selection loses, you collect the backer's stake as profit. If it wins, you pay the backer their winnings from your own funds (your liability).
Lay betting is only possible on exchanges such as Betfair, Smarkets, or Betdaq. On traditional bookmakers, you can only back selections. The exchange matches your lay offer against a backer's stake when the odds agree.
The key number for lay bettors is the liability. If you lay a horse at 5.0 and someone backs it for £10, your liability is £10 × (5.0 - 1) = £40. If the horse wins, you pay £40. If it loses, you receive the £10 backer's stake. Your maximum loss (£40) is much larger than your maximum gain (£10), which means lay betting at short odds offers better risk/reward — short-priced favourites have a lower liability multiple.
Matched betting uses lay bets as a central mechanism. When a bookmaker gives you a free bet, you back a selection at the bookmaker and lay it at the same odds on an exchange. The two bets cancel out any match result, leaving only the free bet profit.
In-play trading often involves laying selections at inflated prices. If a team's odds drift in-play (e.g. they fall behind), a trader might lay them earlier at a short price and back them again at longer odds to lock in a profit regardless of the result.
Example
On Betfair, you lay Manchester United at odds of 3.00 for £50 (someone backs them for £50). Your liability = £50 × (3.00 - 1) = £100. If United win: you pay out £100. If United draw or lose: you collect the £50 back stake as profit.