While funded accounts with Prop firms have become increasingly popular over the past few years, some people still seem undecided between choosing a Prop firm or use a broker trading their own capital.
What is the difference?
“Propfirm” and “broker” are terms often used in the financial industry, particularly in the context of trading and investments. They refer to different types of entities that play distinct roles in financial markets. Here’s an overview of each term:
- Proprietary Trading Firm (Propfirm):
- A proprietary trading firm, often referred to as a “propfirm” or “prop shop,” is a financial institution or company that trades for its own account using its own capital. They do not trade on behalf of clients or customers.
- Proprietary trading firms employ traders who use the firm’s money to execute trades in various financial markets, such as stocks, options, futures, currencies, and commodities.
- The profits generated from these trades belong to the propfirm, and they bear the risks associated with these trades.
- Broker:
- A broker is an intermediary in the financial markets who facilitates transactions between buyers and sellers. Brokers can be individuals or companies that provide access to various financial instruments and markets.
- Brokers do not typically use their own capital to trade; instead, they execute orders on behalf of their clients. They charge fees or commissions for their services.
How Do Propfirm’s Funded Accounts Work?
Proprietary trading firms (propfirms) often offer funded accounts to traders. These funded accounts work in a specific way, which can vary from one propfirm to another, but the general structure is as follows:
- Evaluation and Assessment:
- A trader interested in using a propfirm’s funded account typically needs to go through an evaluation or assessment process. This process may include background checks, interviews, and trading tests to evaluate the trader’s skills and risk management.
- Selection of Trading Capital:
- Once the trader is approved, they can choose the amount of trading capital they want to use from the propfirm. Propfirms may offer different account sizes, each with its own funding amount and profit-sharing arrangement. The trader may be required to pay a fee or deposit a portion of their profits to access this capital.
- Trading Rules and Guidelines:
- Propfirms have specific trading rules and guidelines that traders must follow. These rules often include risk management protocols, position size limits, and trading strategies that are permitted or prohibited. Violating these rules may result in the trader losing their funded account.
- Profit Sharing:
- A significant characteristic of funded accounts is the profit-sharing arrangement. Traders typically share a portion of their profits with the propfirm. The percentage split can vary, and it may become more favorable to the trader as they achieve higher levels of profitability.
- Risk Management:
- Propfirms are often very focused on risk management, and they may impose risk limits on traders to protect both the firm and the trader from significant losses. If a trader breaches these limits, it can result in the account being temporarily or permanently suspended.
- Performance Evaluation:
- Propfirms continuously monitor a trader’s performance. To keep the funded account, traders usually need to meet specific performance criteria, such as a minimum profit target or a specific risk-adjusted return.
- Payouts:
- Profit payouts to traders from their funded accounts depend on the profit-sharing agreement. Some propfirms offer daily or weekly payouts, while others may have longer payout periods.
- Scaling Up:
- As a trader demonstrates consistent profitability and adheres to the propfirm’s rules, they may have the opportunity to scale up their trading capital and access larger funded accounts.
It’s essential for traders interested in using a propfirm’s funded account to carefully read and understand the terms and conditions, including the profit-sharing arrangement and risk management guidelines. These funded accounts can be a way for traders to access additional trading capital, but they come with rules and responsibilities that must be followed to maintain the relationship with the propfirm.