Beginners who are about to make their first steps on financial markets often face the dilemma of whether to go for retail or proprietary trading. Both have their pros and cons. Moreover, they appeal to the needs of different types of traders. The truth is, more often than not, prop trading accounts are the better choice. This guide dives into the topic of retail trading vs. prop trading opportunities. The goal is to help you find out which one is better for your trading needs. Finally, find out whether you can combine them to improve your performance.
The core of this type of trading lies in the word “prop” (short for proprietary). Proprietary trading is when an institution (or a trader within it) trades with its own money. Alternatively, the trading party doesn’t or can’t use someone else’s money (i.e., deposits, loans, etc.) to conduct trades for its profit. Since the institution uses its own money, it collects all profits and bears all risks.
In this guide, we will focus more specifically on prop trading in the context of individuals. A trader usually conducts prop trading with a firm’s money if employed in its prop trading department or has a funded trader account (more on this here). In that sense, the individual serves as an agent for the prop trading firm. The benefit of this type of prop trading accounts is that the profit shares are split between the firm and the trader.
Prop trading is a viable career path for many individuals. It gives flexibility and an easier way to join the markets. At the same time, it also cuts a big part of the risks associated with this type of activity.
How can you become a Prop Trader?
If you want to become a prop trader, you should know that there are different types of mechanisms to make it work.
The best opportunities allow you to start with no initial investment from your side. In most cases, all you have to cover is the cost of the training program. These allow you to prove that you have the skills to make it in financial markets. Prop trading is an excellent option for beginners with limited capital. It gives a platform to learn, practice, and eventually become a professional while keeping costs at bay.
Some prop trading firms have policies that require the trader to provide some or all of the initial investment. In such cases, you are getting a platform and trading tools. Meanwhile, you also retain a significant part of the profits. However, in most cases, it’s still not 100% of what you earn.
There is also a hybrid model where the prop trading firm and the trader participate evenly. The benefit of this option is that equal participation incentivizes more efficient capital use.
To further crystalize the idea of prop trading and how it can help you on your trading journey, let’s focus on its key advantages:
The most significant benefit of proprietary trading accounts is that you might not even have to risk your capital depending on the chosen model. Trading with a prop firm cuts your potential losses to a minimum. At the same time, it allows you to retain a significant part of your returns.
Even if you have to invest a small sum of money, your position is still much better than if you had to start trading independently.
More purchasing power and more advanced strategies
In most cases, the overwhelming part of the capital in your prop trading account will be ensured by the company. Alternatively, you will be trading with more money than you can effectively ensure by yourself. That way, you can take more risks and open more prominent positions. Joining also means there are no limits on the potential profits.
The more considerable purchasing power also allows you to apply more complex strategies, including all types of arbitrage-based market moves.
Good prospects for а full-time career
Prop trading is among the most sought-after career paths. Aside from potentially being very lucrative, prop trading accounts can also provide a flexible and well-organized way to enter the market.
In the case of funded trader programs, you can trade at your convenience and learn at your own pace until you become confident in your abilities. Then, once you nail the exam, you can get a funded offer at a prop trading firm. Doing so will let you kick-start your career from the comfort of your home.
More favorable trading costs
When trading for yourself, depending on the assets you focus on, you might end up paying substantial fees to your brokerage service provider. With prop trading, however, you can take advantage of lower trading costs due to the scale you’re trading on. In addition, institutional traders usually benefit from lower fees as they generate a more considerable volume.
This benefit is even more critical for speculators and active day traders who plan on placing several trades per trading session. If you trade alone, your profits will be crippled by the high trading costs you would be paying to your broker.
Access to professional tools and platforms
Retail traders often have to pay thousands of dollars to ensure access to professional trading platforms, journals, analytical software, data, and other complementing tools. Prop traders, on the other hand, don’t have to worry about this. In many cases, the company they trade with takes care of everything, and all the trader has to do is be profitable.
Disаdvantages of Prop Trading
While all the listed advantages might make it sound like prop trading is the Holy Grail, it isn’t. This type of trading activity still has some flaws, the more glaring of which are:
Strict trading rules
While prop trading might, in many cases, be flexible, it doesn’t mean you can do whatever you want while trading with someone else’s money. If you don’t hit your profit targets or trading consistency requirement, you will simply lose the chance to trade on behalf of the company. In the end, you are getting funded to deliver. In addition, if you lack organizational skills, prop trading firms’ strict rules and policies might be too much for you.
It can be too stressful
This downside is related to the previous drawback and most relevant for traders prone to giving up on their emotions. If you aren’t used to pursuing targets and dealing with the pressure to deliver, then prop trading isn’t your thing. It requires focus and dedication, which often lacks in beginners.
Furthermore, if you trade on behalf of someone else, surrendering to your emotions might cost you the job. If it’s not the first time you go against your strategy, it would be the next one.
It might limit your investable universe
Many prop trading firms will require you to trade only a particular asset class, be it stocks, futures, FX, or else. Unfortunately, this means you might not be able to expand your strategy across different markets. While this is usually a benefit for most beginners as they don’t have to lose focus on tracking several inherently different investments, it might be a limiting factor for traders with more expertise.
What is Retail Trading?
Retail trading describes the activities of non-professional traders who trade independently. These traders use their capital through personal accounts with a traditional or an online brokerage service provider.
Retail traders can buy and sell all types of instruments, including stocks, bonds, ETFs, mutual funds, forex, cryptocurrencies, and more. They usually trade in small amounts and don’t generate significant daily trading volume on an individual level.
Retail trading wasn’t possible a few decades back. However, with the development of the market infrastructure and the introduction of zero-fee brokerage accounts with small initial capital requirements, everyone can start trading today.
The niche has become so popular because, today, traders have access to extensive resources and training programs, which often come for free. The list includes financial information, investment education, and advanced trading tools. These were all inaccessible for the average individual a few years back. However, today there are plenty of tools and guides that can help you make the step to a successful trading career.
Advantages of Retail Trading
Let’s check out the main reasons why the retail trading niche has been booming in the last couple of years and what benefits you can capitalize on if you decide to start trading on your own:
You are your own boss
With retail trading accounts, you have the freedom to trade whatever you like, whenever you want. You have no profit targets to chase or trading frequency to maintain. Due to this, you are free to decide on the size of your positions. In addition, it lets you monitor markets 24/7, what strategies to apply, and so on.
If you don’t feel like trading today, you simply don’t have to, and you won’t have to report to everybody. You can also switch through trading platforms. Doing so lets you choose the most convenient trading tools to use.
It is easier
Prop traders usually feel the pressure to deliver. It might result in rushed trades and significant losses if not backed by the necessary risk management skills and emotional control. With retail trading, on the other hand, you are responsible only for yourself. You won’t be limited in trading particular instruments or maintaining a specific P/L ratio. Trading without a firm takes off a significant part of the stress related to trading activities. If you can’t control it adequately, it might reflect on your health in the long term.
Suitable for anybody
Due to the amount of free educational resources and commission-free trading platforms, anyone can become a retail trader. Thus, even individuals with zero experience can kick off their trading careers if they dedicate the time needed to master the basics.
Furthermore, you won’t even have to invest in expensive trading setups. Retail trading has gotten more accessible and more convenient in the last couple of years. Today, you can trade all types of instruments directly from your phone. Although you simply won’t become a trading guru that way or be considered a severe trader by your peers, you aren’t locked in using particular platforms. So if you want to take things easy and don’t plan to make a living out of retail trading, why not trade on your phone?
Disadvantages of Retail Trading
Now let’s look at the other side of the coin. Where does retail trading fall short in helping you make an informed choice on what career or activity is the best fit for your needs and skills:
Your capital is at risk
The most notable drawback of retail trading is that you trade with your own money. If you lose, then there is nobody to cover for you. While it also means you won’t be splitting the profits with anyone else, the truth is this isn’t especially important for beginners. When you are starting, your goal should be to minimize your losses. Only after accomplishing that can you begin working towards maximizing your profits.
Many first-time traders lose all their starting capital within their first few market moves. To avoid such unpleasant situations, make sure to start trading with a demo account. In the end, you don’t want your retail trading career to finish even before it has begun.
Limited trading opportunities and a lower purchasing power
With retail trading, you will find difficulties trading particular instruments, including futures, alternative investment classes, etc. The reasons for this can vary. However, they’re mostly related to broker-specific policies, regulatory or jurisdiction-specific restrictions, a lack of capital, and more.
When trading on your own, you will struggle to ensure the same amount of leverage as prop trading accounts. Furthermore, trading with a smaller capital base will essentially put a cap on your potential profits. As a result, it will take longer to ensure a steady and sufficient capital to trade at scale and grow your portfolio.
Higher trading costs
While there are commission-free brokers, in most cases, they favor long-term investors. In the case of retail traders and speculators, costs usually apply. These include announcing maintenance costs, commissions, fees for transfers, and more. And their amount isn’t negligible, mainly if you have limited capital.
Furthermore, fees for data service providers, research platforms, market journal software, advanced charting tools, and other essential parts of retail traders’ toolbox might cost a lot. And if you are serious about making it in the trading field, ensuring you have the right tools is necessary.
Retail Trading vs. Prop Trading
If you want to make a living out of trading, you simply have two options.; either to trade on your own or to join a trading firm and operate in a proprietary fashion. While you already know the main pros and cons of both choices, there are a few other things that we should mention.
First, let’s start with which one is the better choice for you, based on your profile and goals.
If you are a beginner with no experience and limited capital, prop trading is your best choice. More specifically, joining an educational program that will equip you with the right skills and competencies and, upon successful completion, will give you a funded trader offer (find out more here).
On the other hand, if you are already familiar with the trading world and have substantial capital, you might prefer the independence of retail trading. Since the capital is yours, you will also have far more flexibility on what trading activity to undertake, how and when you can do it.
In a nutshell, retail trading might be costlier and more complicated. Prop trading, on the other hand, can ensure a flying start for newbies. What you will choose, in the end, depends on your long-term prospects and goals. Traders who are good enough and have the capital needed to successfully navigate the markets on their own usually end up trading independently at some point.
Fees and Commissions
Let’s take a minute to focus on the fees and commission differences between both trading activities.
Retail traders can usually choose from all types of commission-fee structures, depending on the brokerage service provider they choose. Some might offer entirely free trading opportunities, while others might charge you up to $10 per trade for particular instruments. The increased competition in the niche has significantly lowered the trading costs in the last couple of years. In the end, it still depends on what, where, and how often you want to trade. Bear in mind to get familiar with every aspect of the broker’s fee policy and look beyond trading commissions. Inactivity fees and account transfer fees might prove very costly if not timely considered.
With prop trading, on the other hand, you will rarely have to worry about trading costs as they are more competitively priced. Furthermore, the fees are often kept very low due to the significant trading amounts prop shops usually generate.
Leverage in Retail Trading vs. Prop Trading
Here, the case is quite clear – while with prop trading, you can take advantage of leverage (and the amounts can be significant), with retail trading, it isn’t that easy.
In most cases, for a retail trader to use leverage, he would have to comply with different securities regulations and margin requirements. For example, you can’t use leverage with many brokerages if you don’t ensure at least $25,000 in equity and execute more than three-day trades in a rolling five-day period.
Proprietary traders can use leverage based on the amount of the risk capital in their accounts. The specific leverage levels depend on the firm’s policies (and the trader’s experience). For example, you simply won’t have to worry about the $25,000 minimum equity requirement, typical for retail trading accounts. Due to this, prop traders have higher purchasing power and more significant profit potential.
Can you Do Both at the Same Time?
If both have their pros and cons, then why not combine them? You are probably asking yourself this question right now, and it is entirely understandable. You’re still free to mix retail with prop trading at any point you want. However, you shouldn’t expect it to result in a quick “get rich” scheme.
In a scenario where you plan to combine prop with retail trading, the chances are you will be more actively involved in the former. In that case, retail trading would be just a side gig, complementing your primary activities. And there is nothing wrong with this.
Bear in mind that both might only work if they are concentrated around similar trading strategies and markets. For example, let’s say you’re trading futures on margin as a prop trader. Simultaneously, you’re also trading biotech stocks as a retail trader. It would simply require too much focus and dedication from your side. The continuous efforts, in-depth research, and skills needed to recognize opportunities within both markets successfully might be too exhausting to invest in for the long term, alternatively if your prop and retail trading activities differ too much from each other. In the end, you might struggle to deliver on both sides.
However, this isn’t to say that retail and prop trading can’t co-exist in your daily activities. On the contrary, just the opposite – if adequately combined, they can bring you on top of your game.
How Prop Trading Can Help You When Retail Trading
The best way to combine them is to use prop trading opportunities (i.e., a funded trader program) as a platform to master your skills and start making real money without risking your capital.
Once you become a well-versed trader with a deep market understanding, you can start applying what you have learned in your retail trading activities. Such a combination gives you a safety net to support you. Meanwhile, you get first-class resources that can be helpful in your solo career.
That way, you won’t have to learn on the go while trading with your own money. Instead, you can leave all mistakes in your funded trader programs. They can introduce you to the world of prop trading, and after you are confident enough, to start trading on your own.
The combination of both can make you a better and more confident trader while at the same time multiplies your returns and minimizes your risks.
What Are the Benefits of Prop Trading Over Retail Trading?
The main benefit of prop trading over retail trading is that it is easier to start, and you can profit without risking your capital. In fact, in many cases, you might not even be required to deposit significant funds. You also get an account with higher purchasing power and access to features and instruments otherwise unavailable for retail traders. Prop trading also grants you the freedom to apply more sophisticated trading strategies.
One of the most significant benefits of prop trading over retail trading is that you are provided structured and market-tested training. That way, you can equip yourself with the necessary expertise to successfully navigate financial markets. You can also interact with other traders and industry insiders, which naturally raises your level.
Another significant benefit of prop trading over retail trading for beginners is that it ensures a calmer and stress-free environment to get familiar with yourself. As you are just starting, you are yet to get acquainted with your personality traits as a trader (i.e., biases, emotional profile, risk tolerance, etc.). It is always better to understand and learn to manage these specific parts of your character as a prop trader rather than a retail one. The other way around will probably cost you much hardly-earned money.
Last but not least, trading with your own money is considered one of the least effective ways to enter the trading space. The main reason is the capital and regulatory restrictions. And if you can overcome those by becoming a prop trader, then why not?
Beginners can rarely set aside more than $2,000 – $3,000 as starting capital in general. Unfortunately, such amounts aren’t precisely sufficient for actual trading activities as trading costs and commission fees would quickly deplete them. Furthermore, they limit your purchasing power and significantly reduce your loss tolerance. As a result, you will have to develop a more conservative risk management strategy. As a result, you won’t grow your portfolio as quickly as you might like.
If you are a beginner who wants to make a living out of trading, then prop trading might be the way to go. Once you master the market theory and prove yourself as a prop trader, you will get more confident. Consequently, you’ll also become a more successful retail trader.