Definition
A prop firm (or proprietary firm) is a company that provides individuals with capital, in return for a percentage of the profit generated by the trader.
What are the benefits of using a prop firm?
Using a prop firm when beginning your trading journey comes with multiple benefits. Some of these benefits include:
Access to capital
The biggest advantage of using a prop firm for trading is the access to capital to start trading with. One of the biggest concerns for traders is allocating a budget for trades. Using a prop firm can give traders the funds to start their trading journey or to grow their trading portfolio.
Low risk
Since traders use the firm’s capital, instead of their own, the risk is smaller. Traders can afford to make moves that they might not have otherwise because they have higher capital.
Mentorship
Many prop firms will give traders access to a community of professionals and experienced mentors. Traders can benefit from these professionals by seeking their advice and expertise when making trades.
Software
The software that prop firms provide is generally more sophisticated than the technology traders may have access to by themselves.
Community
Trading can be a lonely profession. When trading for a firm, you get access to a community of traders who look to support and help each other. Traders are welcome to join platforms such as Discord, where they can ask questions, offer advice, and share knowledge.
For more information and additional benefits, check out our article Benefits of Using a Prop Firm.
How can I find the right prop firm for me?
There are many prop firms out there that may promise you things that sound too good to be true. Follow these steps to make sure you choose the right firm for you:
- The first thing that you’ll want to do when choosing a prop firm is to decide which factors are important to you. Some firms offer higher capital in return for a higher percentage of the profit. Whilst others may demand a smaller percentage of the profit, but lower capital to begin with. There are many different firms with an array of different programs to suit different types of traders.
- Find a firm that shares your goals and objectives. If you don’t get the impression that you’re on the same page and working towards a common goal, it might not be the firm for you.
- Make sure that the challenges offered are suited to your trading style and to your routine. Don’t jump into a challenge too fast. Make sure you read all the terms of the challenge carefully. There are many different challenges at different firms, so there is bound to be a challenge that is suited to your trading strategy.
- Spend some time researching different firms to make sure you choose one with a good track record. There are many websites with user reviews. Trustpilot is a good place to start. Make sure that the firm is reputable and trustworthy.
- You will also want to make sure the firm that you choose has good customer service and a user-friendly platform. These will ensure that you have a positive trading experience.
For more information and additional guidance on how to choose the best prop firm for you, check out our article 10 Questions to Ask Yourself Before Choosing a Prop Firm.
How do prop firms make money?
Prop firms cover themselves by making sure that traders are able to generate profit. They do this by putting them through an evaluation period to prove their trading skills. Only once a series of challenges has been completed; traders are eligible to receive the entire capital.
Common interest vs. conflicting interests
Unfortunately, there are firms that make challenges too difficult and they do this to make money from people’s failures eg. FTMO. There are even firms that have collapsed due to the fact that they relied so heavily on people failing their challenges. The issue was that too many people passed the challenges and they weren’t financially prepared.
If the firm makes a profit based on profitable trades, the financial success of the company relies on the success of its traders. The better the trader does, the better it is for the company. When you choose a firm like this, you are working together towards a common goal, and in return, you’ll be met with support and valuable resources.
What are the risks that I should be aware of when using a prop firm?
Trading with prop firms can generate high profits, however, there are risks that come with it. You’ll have to keep an eye out for these things to keep your money safe.
- Firms can go under, leaving traders with nothing.
- Prop firm trading fees and profit percentages are high. This means that not only will you have to put down money to start trading, but you’ll also have to share your profits with the firm. These fees and percentages differ from firm to firm.
Because of these risks, you’ll want to take the following steps to keep your money safe:
- Research the company and make sure they’re trustworthy and reputable. Trustpilot is the best place to start, but there are also forums and YouTube reviews.
- On the same note, don’t use a brand-new firm. There are many disreputable prop firms that open very quickly and then get shut down just as fast. Make sure you use a company that has been around for a while and has a good reputation.
- Read the fine print clearly, make sure you are aware of all the trading rules. There may be strategies that are not allowed that conflict with your trading style.
- There are companies that try to manipulate the market, they buy followers and post fake reviews. If you want to know how to detect them- read this article
What should I expect?
If you choose to start trading with a professional and legitimate firm, you can expect to be met with support and guidance. Your firm should make clear to you the terms of the package, what they are prepared to deliver to you, and what you are expected to give in return.
In conclusion, for those serious about beginning trading or expanding their trading portfolio, using a prop firm is an invaluable tool. They can allow traders to generate profits that they would not have had the opportunity to otherwise, all with the added benefit of the support of seasoned professionals.
