What is Prop Trading?
Proprietary trading refers to when an entity (a trading firm) uses its own capital to trade the financial market instead of wanting individuals (traders linking accounts to firm’s trading accounts) to deposit capital into the firm’s fund with the aim of wanting the firm to trade the deposited capital by an individual for a profit share as Hedge Funds do.
Many proprietary trading firms have adopted different strategies which required different regulations by the government. Even so, the new model or funding program which aimed at helping experienced traders with limited resources advance their trading skills has lately been introduced with few complications and validations.
Proprietary Trading or Hedge Funds?
There still exist many questions as to which is the best option between hedge funds and Proprietary trading. Prop trading firms have a competitive advantage and access to valuable information that can help them reap big profits and better performance across their traders and accounts.
Many traders confuse hedge funds with proprietary trading as hedge fund secures funds from their clients, invest them on their behalf. On the contrary, propriety trading firms aim at providing capital to their experienced in-house traders, give them a profit share percentage of the traded capital based on their trading performance. The risks between traders’ transactions are limited since grouped at live and simulated accounts to the firm’s fund accounts. This provides traders with a bigger account size in their beginning journey so that they minimize risking their own capital or trading a small account balance and making insignificant profits.
Benefits of Modern Proprietary Trading
There are many advantages to and proprietary trading. To cover a few, both reduced the market complexity by providing necessary resources to both beginner and experienced traders, a trader is able to develop own trading plans, test viability on firms simulated accounts before getting actual capital, increased profits, and reduced trading risks, all in those, a trader is more equipped with relevant trading skills and the edge of the financial market.