Basic Question: How are profits typically calculated for profit payouts

Hi guys,

Please forgive my ignorance on such a simple thing, but if you could share some knowledge on the topic it would be most appreciated.

How is net profit calculated for the purposes of a (say 50-50) profit split? More specifically, is a particular month's profit determined by the end-of-month balance minus beginning-of-month balance?

For example:
Simplifying things a little (no expenses, assuming a monthly payout, etc) -- If a trader begins with a $100,000 account (Month 0) and makes $10,000 in the first month, he takes home $5000 and the firm makes $5000 - ok. But if he loses $20,000 over the course of Month 2 ($0 profit) and then makes $50,000 over the course of Month 3, does he get paid $0 in M2 and $25,000 (half of $50,000) in M3 OR would he have to cover the $20,000 first and therefore only get paid $15,000 (half of $30,000) in Month 3?


Separately, if Trader A put up $20,000 and a firm put up $80,000 (assuming trader pays desk fees, etc) what would a typically payout percentage be?
(I recognize this is a broad question and it would be firm dependent, but if you would be so kind as to indulge me, what would be a reasonable range for both the trader and the firm, assuming the firm does not profit off of anything except the trader's profits)

Thank you in advance for your help!

Eric

 

Yes, assuming you are also splitting all fees and expenses that hit the account.

 

So in my example, the trader would be paid 25,000 at the end of month 3, not 15,000 right?

Also. What's a reasonable profit split for a trader who puts in 20% of his initial trade balance, assuming the firm only makes $$ from trade profits.

Thanks,
Eric

 

Rather than respond to your example, let me say this is a contractual issue. What is typical is to create a high water mark. $100,000 account...profits...split up what ever profits you contract says. Anything left over $100,000 can be split in the future. Some contracts have hold backs. Now if the account drops below $100,000, you don't get paid until you get back over, then you split as usual for the value over $100,000. Some contracts only hold over losses for up to one year.

Now let's talk about losses. If your funds are 1st loss and you drop below $100,000, they will normally not give you back profits to cover losses from past splits. So you have an incentive to hold off taking money out. If it is an investor that put up the funds, you contract will have to say if they can claw back profits to cover losses, otherwise they can't.

The reality is that there is no normal, you have to have a contract that works for everyone and spells this out.

 

Thanks for the full answer. Much appreciated.

 

My advice is to make no assumptions when you go into business with someone, even family. Spell out everything and in a "exhibit" provide examples.

 

Absolutely - especially with family! no reason to let ambiguity cause problems haha.

In an agreement with an individual investor, if I put up $20,000 and he/she puts put $80,000; and first loss is taken from my $20,000 and trade platform fees are paid by me: What would a 'fair' profit split be?

(In your opinion, if u were the trader looking to set up such an agreement, what profit split would you propose?) -- also assuming payout only when account is above 100,000.

Thank again for your help, really interested in your take on this one!

 

Interesting. It it were me and I put up the first loss money, I would expect both you and the investor to share all expenses based on your profit split. As for the split, I should not comment on publicly, sorry.