Chances are you’ve heard of retail trading. It’s when investors use their own money to buy assets. However, if you’ve ever wanted someone else to put up the funds, you may be interested in prop trading. It’s a less common model where firms give their capital to qualified professional traders and have them invest it.
It may sound like a cheat code since you’re using a financial institution’s vast capital to make trades without having to risk your own money. However, there are risks to consider with prop trading vs retail trading, and the bar to qualify is high.
What is Prop Trading?
Prop trading involves using an investment firm’s capital to trade assets. You will have to share a small percentage of your profits — most firms take a cut between 10% to 30% of a trader’s profits — but you don’t have to put up your own money.
Financial institutions that permit prop trading have strict requirements about which strategies you can use and what type of returns you must generate to maintain your trading privilege. However, prop traders get access to advanced tools that aren’t available to retail investors, which can increase your chances of success.
If a prop trader blows up the account, the firm is on the hook for the losses, and that’s why they won’t take just anyone. Applicants often go through rigorous tests and a simulated trading program before getting any capital from a financial institution. Each prop firm has different trial periods. Some may test you over a two-week market simulation, while others may want to see how you perform in a simulated market for six months.
Forex, futures, stocks, and options are four of the most popular asset classes among prop trading firms. If you’re good at trading any of these assets, you may have a shot with prop trading firms. Some of the best-known names include Apex Trader Funding, FundedNextFutures, and RebelsFunding.
What is Retail Trading?
Retail trading has a lower barrier to entry. You just have to deposit money into a brokerage firm and start investing. You don’t have to follow strict rules and can trade any assets you want. Retail traders can also take their time, while prop traders often have tight deadlines for achieving certain returns.
Retail trading platforms like Fidelity and Vanguard make it easy to create brokerage accounts. They’ll give you a wide range of tools, but they’re not as advanced as the ones prop traders get. Since you’re trading with your own money, you don’t split profits with a firm, but you do have full exposure to any losses that your portfolio incurs.
Key Differences Between Prop Trading and Retail Trading
Both kinds of trading give you exposure to equities, currencies, derivatives, and other types of assets. However, there are a few important differences between prop trading and retail trading to keep in mind before making a choice.
Capital Source
When deciding between prop trading vs retail trading, it’s important to consider where your money is coming from. Prop firms give you their capital and let you make trades. As a retail trader, you’re self-funded. Prop trading is less risky for you because you won’t lose your own money, but if you incur enough losses for a trading firm, they’ll cut you off.
Risk Exposure
Prop firms impose several rules that limit which assets traders can buy and how frequently they can trade. Retail traders can take any risky strategy they desire, but they have more exposure to risk since it’s their money.
Leverage & Buying Power
Retail traders can use margin to boost their purchasing power. Margin is similar to a loan, and you incur interest against the money you borrow against your portfolio. The leverage that comes from margin can amplify your gains and losses and is a high-risk investing tool that is only suitable for advanced traders.
Prop firm traders get more leverage and buying power than retail traders. Some firms give professional traders more than $100,000, but the key difference is that traders don’t pay interest or have to repay any investment losses.
Regulatory Requirements
Prop firms face fewer regulatory hurdles than brokerage firms, which allows them to engage in riskier strategies. However, both types of firms have to fulfill regulatory requirements. Prop firms are registered as businesses but not as brokers. Meanwhile, all stock brokers must obtain licenses and registrations from the Securities and Exchange Commission and other regulatory bodies.
Profit Structure
Retail traders get to keep all of their profits. When they invest money, they reap all of the risks and rewards. Prop trading firms get a percentage of a trader’s profits since they’re putting up the money. Most prop firm traders get to keep 70% to 90% of the profits they generate from trades. However, some prop firms aren’t clear about their rules and tack on hidden fees, so do your research before committing.
Access to Tools
Investors can find plenty of resources on retail trading platforms, but prop firms offer more advanced tools to help traders compete with hedge funds and institutional investors. That kind of access may not make much of a difference for retail investors who make small trades or buy and hold simple securities like index funds, but it can make a significant difference for professional traders.
Which is Right for You? Choosing Your Trading Path in 2025
Prop trading may sound like a better deal than retail trading, but that’s why prop firms won’t let anyone tap into their capital. You have to meet their rules and pass their tests to start working with them. You also have to do your research to ensure you aren’t working with a fraudulent prop firm or one that slips in a bunch of hidden fees.
Retail trading is more suitable if you have a longer time horizon and don’t want to be a professional trader. It’s hard to be a prop trader and have a full-time job, so you should only pursue that route if you make almost all of your money from trading. If you already have enough capital and are in it for the long haul, retail trading is the better option.
Frequently Asked Questions
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No. Prop trading is less risky since you are using the prop firm’s capital to make trades. When you make retail trades, it’s with your funds.
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You can make the switch if a prop firm approves your application. You will first have to demonstrate that you can generate sufficient trading profits in a simulated market.
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Not all prop firms require that prop traders have licenses. While a license will let you choose from a greater range of prop firms, some firms only assess traders based on their skills and ability to produce profits.
