Pardon my ignorance, but what is a prop firm, I've researched the topic a bit but am at a loss to really grasp the full concept. Do they lend you money - is it a glorified version of margin lending or RegT? Yet, is there some sort of profit sharing involved, and yet also 'training' and a sort of partnership? Say you had a decent amount of funds, 100k+ I can't fully understand what the advantage of prop trading is, any comments welcome.
In brief, at a prop firm a trader gets higher leverage on stocks and/or lower commission on futures (futures firms usually get exchange member discount). Some firms don't require capital contribution and may even pay salary. Otherwise, benefits are intangible like sitting next to other traders. Read this recent thread for a full picture.
Here is something that might shed some light on the subject for you. http://www.stocktrading.com/startingtotrade.html In general (not for everyone) it takes $500K-$million or more to make a good living in this business. This allows for trading morning gaps, correlated pairs and mergers etc. Many choose to simply put up $20K or so and use the Firms money for this, keeping their "other money" in a safe place. Send a PM if you have more questions. Don
Thank you for the insight, I think it might be the intangibles you mention that are the added value to Prop Trading and are the extra component that isn't immediately obvious.
BS you can make a nice living with $150-300k BP. $300k you can trade up to 20k shares of BAC... if you can't make a nice living going in and out with 1000-10,000 shares of BAC/GE/F, or fewer shares of higher priced thinner stocks, you suck as a trader.
Most do suck, which is the main motivation for joining a prop firm. If they didn't, they would make a few trades in the morning over coffee from their home office and then hit the golf course in the afternoon.
I think I said it "usually" takes about that much. Sure, some can do fine with less. I use my traders as a gauge, some never use more than $250k or so (except for their opening only orders, which many use a $million or more). Many "day" traders don't need to use much more capital, but I feel it takes using more strategies these days. Our market neutral strategies, pairs and mergers and the like, often do use much more of course. It's nice to have the capital available when needed. In the case of someone with $100K, they can use $200K-$400K, or they could leave $80k in the savings account and still use that much when trading. For the guy with $20k, they can obviously use that much or more. I've always said, "not for everyone" - of course. And, that's it now always just about the capital - other "value addes" items come into play as well. All the best, Don
The amount of capital required and profit split will vary by firm. You also get to lever up your capital at a greater rate than a standard retail account. The best way to learn at a prop firm is by watching how other successful traders interpret the charts, and then by implementing a strategy that suits your personality and style. Unlike a retail account, the funds you place at a prop firm are NOT insured by SIPC, so if you have a "decent amount of funds, 100k+" then you can decide what portion of that amount you feel should be at risk.