In the dynamic nature of finance, trading is the central element that unlocks various opportunities. This is for individuals and institutions building and expanding their financial assets. There are two outstanding trading styles: prop trading and retail trading. Each of these offers definite pathways and comes with its features and benefits.
What is Prop Trading?
Proprietary trading, or prop trading, in short, is a situation when financial firms or banks utilize their money for investments and earning profits. Rather than making money from client commissions and fees, as in traditional trading, prop trading’s main focus is on the direct gains from trading activities.
This method gives institutions the chance to use their deep expertise, advanced technology, and robust risk management to seize opportunities in the financial markets and potentially boost their returns.
What is Retail Trading?
Retail trading is a domain in which individual investors take command of their financial futures. They trade with their own money on different online trading platforms. The traders can be novices or experienced. Independence is the factor that sets them apart.
Every decision is taken by them. Access to extensive resources that institutional traders enjoy is not given to retail traders. In return, these traders get something more valuable, i.e. the freedom and personal control to tailor their investments to their preferences and goals.
Retail Trading vs. Prop Trading: Key Differences
Several major differences exist between retail trading and proprietary trading. In the case of being a retail trader, you are essentially an island unto yourself: you fund your accounts, develop your forex trading strategies, and handle the trades yourself. It’s all on you.
On the other hand, in proprietary trading, you work with more organized setups. Suppose, while trading with a prop firm, you have to follow that specific trading set-up the firm has.
1. Funding
As a retail trader, you need to safeguard your trading capital, which may be from your savings or salary. The prop trader, on the other hand, usually uses the funds supplied to them by the trading firm. Most of the firms in prop trading provide their traders with a funded trading account to trade with while taking financial responsibility upon themselves.
2. Profits
Regarding profit, retail traders keep all the amount they gain from profits. However, they have to bear the impact of a loss they make. Prop traders normally have revenue-sharing deals with the firm. They may take around 70% of the profit they generate, while the rest is given to the firm. That means a prop trader will have a share in his success and thus share the rewards.
3. Work Organization
Retail trading provides you with a high degree of flexibility. You have access to set your schedule and choose when you want to trade. This gives you complete control over your trading activities. Prop trading, however, is generally more structured. The firm may have specific guidelines and expectations, making it harder to step away from the market for extended periods.
4. Solo vs. Team
Retail traders work independently, make all of their decisions, and manage all aspects of their trading on their own. Meanwhile, in prop trading, you’re mostly part of a team. This collaborative environment can provide support, shared insights, and a collective approach to trading strategies, but it also means working closely with others rather than going solo.
5. Fees and Commission
Commission-fee structures vary, and which one depends on the brokerage service being used. Some have fully free trading, others charge up to just about 10 dollars for a trade on some specific instruments.
Behind this market change, there is significantly increased competition that has greatly reduced trading costs on this exchange over the past years. Nonetheless, it matters what you trade, where you trade, and how much you finally do it. Thoroughly understand the fee policy of the broker, and also look behind the trading commissions. Unexpectedly high inactivity and account transfer fees can stand in your way if not considered in advance.
With proprietary trading, you usually don’t have to consider the cost of trading very much. Most prop trading firms enjoy better pricing, and their fees stay low since they are processing large volumes of trade.
6. Retail Trading vs. Prop Trading Leverage
In this case, the line is very clear between proprietary or prop trading and retail trading. Of course, you can use much bigger sums of capital with prop trading, which in many cases is very hard to do with retail trading.
In retail traders’ hands, it comes with a lot of regulations and margin requirements on the leverage of capital. For example, most brokerages are forbidden from allowing you to trade with leverage unless you have at least $25,000 in equity and don’t make more than three-day trades within the rolling five-day window.
In contrast, proprietary traders receive leverage as per their available risk capital in the account. The leverage amount a firm allows depends on the firm’s policies and the individual trading experience of its prop trader. That means prop traders are free from the $25,000 minimum equity requirement, generally in the case of retail trading accounts. As a result, prop traders have greater buying power and can generate more significant profits.
What to choose? Prop Trading or Retail Trading?
Prop trading offers many benefits in comparison with retail trading; hence, prop trading attracts both novice and professional traders. One of the most appealing is the entry barrier. In the case of retail trading, you will typically have to put up your capital to start, whereas in prop trading, this requirement is quite constrained or, sometimes, not needed at all. You can immediately start trading and begin to make money by using your already posted profit without any personal outlay.
Furthermore, the buying power for prop trading tends to be larger, offering better leverage, along with the best trading platforms in the market and instruments, not available in retail trading, such that sophisticated trading strategies can be implemented for more profit potential.
The most significant advantage of prop trading is the formalized and field-tested training. In this regard, this training will provide you with the necessary knowledge to profit in the financial markets. Since you are part of a prop trading company, you will be allowed to work and communicate with other traders and people within the industry-assuring a cooperative atmosphere that will lift your skills and knowledge easily.
With prop trading, it’s less scary because you will have gotten to know yourself. You will have known your biases, your response to emotions, and your risk tolerance. Knowing and managing these traits in prop trading will protect you from potentially costly mistakes common in retail trading.
In truth, trading with one’s capital is generally considered to be the worst entrance into the trading space because of capital and regulatory constraints. Becoming a prop trader provides a way to sidestep those issues, making it a wiser and more effective avenue to get into trading. Since becoming a prop trader provides an opportunity to start in just that position, it’s one avenue worth looking at.
How to become: A Retail trader vs. Prop trader
One of the common ambitions of many, becoming a retail trader or a prop trader has two quite different ways of complexity and requirements towards each.
Opening an account as a retail trader is a very simple process. You just sign up with your email, attach the verification documents, and you’re good to go. It pretty much takes only a few minutes to get through the whole procedure. It is designed to be easy and fast, which is what attracts so many people to this option in the first place.
In turn, in prop trading, the game is more detailed. Since you go through a more elaborate onboarding process, be ready to fill in lots of information for the company. Besides, you will pass through a training period that may last on average from a few weeks to several months depending on particular firm requirements.
It gets worse still if you intend to run a trading floor. You will need to advertise and hire traders and use the relevant resources to train the traders up to the standards of the firm.
While both roads lead to the same destination-trading-the level of commitment and preparation is vastly different in proprietary trading, just as the responsibilities and possible rewards are being taken on.
Conclusion
Setting aside more than $2,000 to $3,000 as starting capital might be a challenge to beginners. Unfortunately, these amounts are just not good enough for meaningful trading activities, as the consumable costs of trading and commissions could quickly eat into them.
With this little capital, your purchasing power is hugely constrained, and your ability to sustain losses will be highly compromised. This, therefore, calls for the adoption of a conservative risk management approach, and it will retard the growth of a portfolio.
But if you are an ambitious beginner trader for making a living at trading, then prop trading may be the answer. You would gain confidence through mastering market theory and already having proved yourself as a prop trader. So through this means, you would be a successful retail trader as well.