TL;DR:
Prop firms offer traders simulated accounts and profit-sharing opportunities with minimal personal financial risk, unlike brokers who require personal capital. Prop trading appeals to traders due to limited losses, performance-based profits, and access to resources.
Whether you’re new to trading or have plenty of experience, it’s important to understand your options.
We’re not talking about options in terms of your trading style or the types of assets you trade. Instead, we’re looking at something more basic. Namely, the type of trading you engage in.
Traditional trading, with a broker and an account, is a common option. But it’s far from the only one. Prop trading has emerged as a popular choice with some clear benefits.
We’ve covered some key “how” and “what” topics in our guide, including our last chapter on choosing the best prop firm challenge account. Now, let’s focus on a very important “why” topic. Specifically, prop firm vs personal account?
So, which is better prop firm vs broker? Let’s take a closer look.
Comparing Prop Firms to Other Types of Trading
Let’s begin by first understanding the key differences between a prop firm and a broker. Here’s the overview:
Prop Firm vs Broker
We’ve covered what prop firms are and how they work in Chapter 1, so here’s a brief recap:
- Prop firms offer simulated accounts to traders, where traders pay a set fee based on account size and factors like the specific rules of the account.
- Prop traders do not use their own funds to make trades. The size of the account they buy sets the limit for the simulated funds available to them. This empowers traders to engage with the market at a scale that wouldn’t be possible with standard, broker-based trading.
- Are prop firms worth it? While the trading is simulated, the profit splits are real. At FundedNext, traders who follow the rules of their prop firm accounts and consistently make successful trades can earn profit splits of up to 95%.
So, how are prop firms different from brokers? As Investopedia explains, a traditional broker is a professional who normally works for a firm, takes orders on behalf of clients, and often offers advice or guidance. Brokers may work with a range of asset classes, from stocks to Forex pairs and many others.
Brokers tend to earn a commission based on the volume of transactions they handle but can earn money in other ways.
Discount brokers have grown more common in recent years. These brokers are more like service providers who allow individuals to make their own trades than professionals who provide advice and execute trades.
Hence, the question is – what sets working with a broker apart from partnering with a prop firm? The major differences to consider when comparing a prop firm vs a broker are:
- Working with a broker means trading with your own money directly, while prop firms use fixed costs for simulated accounts (see the costs for our Stellar challenge accounts as an example) and add-ons.
- When using a broker, traders are limited to using their own funds. While brokers offer leveraged accounts, traders are still responsible for the full amount owed when they lose a trade.
- Brokers provide the full profit (or loss) of a trade, minus their commission, to their customers. Prop firms provide generous profit splits for successful traders, but prop traders aren’t responsible for the costs of a losing trade.
This comparison also applies to brokers vs personal accounts. A personal account is a key tool used to engage in traditional trading, whether it’s with a full-service or discount broker.
Benefits of Working with a Prop Firm
Now that you’re more familiar with the differences between prop firms and brokers, let’s take a closer look at some of the key benefits leading prop firms provide to their traders.
Reduced Personal Risk
Every type of trading that offers a potential profit also includes a financial risk. With prop firms, however, that risk is clear and limited.
You can see the price of a challenge account and any optional add-ons, like account resets, ahead of time. That’s the extent of the financial risk.
Even if your trading activities lead to significant losses that exceed the maximum drawdown and cause your account to close, for example, the most you can lose is the cost of the account itself and any add-ons. You are not expected or required to pay for the cost of those losing trades.
Performance-Based Profit Splits
Prop traders who comply with account rules and make successful trades earn profit splits. At FundedNext, profit splits are as high as 95%.
In contrast, brokers subtract fees, commissions, and losses from any profit earned. One of the most important advantages of prop firms is limiting the risk of losses while still providing attractive payouts to successful traders.
Community and Resources
Leading prop firms provide more than only a trading platform and dashboard. They also offer access to trading communities (like our Discord group), technical support, and educational resources at no extra cost.
Full-service brokers provide professional advice but are often much more expensive than discount brokers. And discount brokers do not provide that kind of advice.
Prop Firms vs Brokers: Are Prop Firms Worth It?
For many traders, prop firms are attractive because they limit the risk of losses while offering generous profit-sharing rewards. This alternative style of trading is definitely worth considering as you decide how to get involved with markets like Forex, indices, commodities, and crypto.
Want to learn more about prop trading? Check out Chapter 5 of our guide, where we go into more detail about prop firm payouts and profit sharing.
Ready to start prop trading? Unlock your trading potential. Start your FundedNext Challenge now!
