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Retail Trading vs. Proprietary Trading

8 November 2020 No Comment

If you want to actively trade stocks, there are generally two different paths you can take: proprietary trading or retail trading. Many new traders don’t know the difference between these two types of trading. However, if you want to figure out which option is best for you, you need to be able to distinguish them from one another. Check out this detailed comparison between retail trading and proprietary trading.

What Is Retail Trading?

Retail trading is when you trade securities for your own personal accounts, and it is simpler than proprietary trading. To become a retail trader, all you need to do is select a broker, sign up for an account, make a deposit, and start trading.

Since you’re regarded as a customer of the brokerage firm, you’ll be using your own money instead of the firm’s. Consequently, you’ll enjoy more flexibility in terms of the types of trading activities you can undertake, the trading style and techniques you want to adopt, and the times at which you trade.

What Is Proprietary Trading?

Also referred to as prop trading, proprietary trading usually requires you to use money that belongs to a broker or hedge fund. Typically, this form of trading is speculative in nature and involves trading derivatives and other complicated investment instruments. Several factors limit prop trading activities, including the risk manager and the amount of money the firm or hedge fund has.

Differences Between Retail Trading and Prop Trading

When deciding to open a trading account, many new traders compare brokers based on their products and the costs involved. However, some people may not realize that retail brokers and prop brokers actually offer different products at different costs. The following are some of the main differences between retail trading and proprietary trading:

  • Fees and commissions: Retail trading brokers typically charge a fixed per-trade commission and a platform fee unless traders meet certain minimums in terms of account size or trading volume. On the other hand, prop trading fees tend to be more competitive than retail trading fees, but you’ll likely have to pay a portion of your profits to your broker.
  • Leverage: In retail trading, your margin account must meet certain securities regulations and margin requirements. Prop trading firms give you access to more capital because their leverage is based on their own policies and the risk capital deposited.
  • Rebates: Retail trading brokers usually don’t pass electronic communication network (ECN) rebates to day traders because they route orders to the most cost-effective destinations. In prop trading, you’re allowed to take advantage of opportunities to add liquidity and get rebates, which can be a good source of income.
  • Educational resources: If you’re a retail trader, you’ll receive a wide range of educational resources from your broker, including how-to articles, training videos, visual media, and trading seminars. Prop brokers generally provide much more valuable and hands-on education for their traders because their own capital is at risk.

When choosing between retail trading and proprietary trading, you should decide based on your risk tolerance, profit goals, and trading style.

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