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4 Benefits of Proprietary Trading

Author: Tahir Ismail
by Tahir Ismail
Posted: Nov 08, 2020
proprietary trading

Many individual traders have begun to take up proprietary trading because of their low risk and high earning potential. This type of trading maybe a little more complex than retail trading, but it offers a number of benefits over its more traditional counterpart. Check out this comprehensive guide to learn how proprietary trading works and why you should give it a try.

What Is Proprietary Trading?

Also called prop trading, proprietary trading allows you to use a brokerage firm's money to trade stocks and other financial instruments. As a prop trader, you'll act as an agent for the firm and receive a portion of the profits you generate. Typically, the broker will provide you with a trading platform and the training you need to trade successfully.

In general, proprietary trading requires a low initial investment, but it offers great profit potential. You can use a wide range of strategies to maximize your returns, such as index arbitrage, merger arbitrage, volatility arbitrage, and global macro-trading. However, your potential returns are limited based on the size of your initial investment.

What Are the Benefits of Proprietary Trading?

Some traders argue that there's little reason to work with a proprietary broker when they can generate profits using a personal trading account. However, prop trading offers some benefits that you won't be able to realize by simply trading with your own capital. Here are a few good reasons why you should consider doing proprietary trading:

  • Access to a larger capital base: If you use your own capital, you may not have a large enough asset base to generate high revenues. By giving you access to additional funds from your brokerage firm, prop trading enables you to increase your trade volume, leading to higher profit potential. It ensures that you use the leverage that comes with fixed costs to generate higher returns.
  • Lower risk level: As a prop trader, you're only required to put in a small amount of money as an initial investment. Usually, your broker will come up with a significantly higher portion of the capital. With small equity participation, you won't be taking such a big risk. As such, you'll also be able to pursue riskier trades, which is something traders using their own money are more likely to avoid.
  • Lower commissions and fees: If you decide to trade on your own, you must be prepared to pay higher commissions and fees. In prop trading, commissions and fees are generally lower because trades are carried out in higher volumes and more frequently. Also, your broker will charge minimal to no fees for maintaining your account.
  • Access to training: Since it contributes a substantial amount of capital, a prop firm will most likely provide you with proper training before you start engaging in live trading. Additionally, you'll develop as a trader by working alongside other traders and having access to a wide range of training materials.

If you're interested in the high earning potential and low risk involved in proprietary trading, then this type of trading might be for you.

About the Author

Tahirnajmi is an evergreen investor that creates, grows, and funds innovative companies and talented entrepreneurs in the St. Louis region.

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Author: Tahir Ismail
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Tahir Ismail

Member since: Aug 29, 2019
Published articles: 12

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