Key Differences and Similarities Between Prop Firms and Retail Brokers

Daniel Urbánek
Daniel Urbánek
June 28, 2023

Looking to trade but unsure which provider to go with? Our article dissects the main differences between prop firms and retail brokers, helping you choose right.

As a trader, you are always looking for opportunities to maximize your profits while minimizing your risks. On your journey, you will encounter distinct types of providers and entities, which bring markets closer to you and allow you to make trades. In this article, we will have a look at two of them: prop trading firms and retail brokers. We shall compare the two in terms of cost, efficiency, flexibility, risk, and so on, to help you choose the right partner. Understanding these differences and similarities is among the basic knowledge that every successful trader should have.

Key Takeaway:

  • Retail brokers allow trading with personal capital and cater to both beginners and experienced traders with their own brokerage platforms.
  • Prop firms let traders use the firm's capital, offering higher leverage, advanced tools, and the possibility of fast scaling for more experienced traders.
  • Key differences include fees, flexibility, capital and leverage, starting requirements, and provided resources.
  • Generally, prop firms are suitable for users wanting to pursue trading full-time, while retail brokers cater to a broader spectrum of clients.

Retail Brokers - The Industry Standard Since the 1970s

Since the 1970s, retail brokers have been a key part of the trading world. They've made it easier for everyday people to try their hand at the financial markets. Let's have a look at how retail brokers work and how they've adapted to the modern world of online trading.

Retail brokers essentially act as a middleman between you and the financial markets. They offer trading platforms that are designed to be user-friendly. These platforms are your gateway to buying and selling a range of different investments, such as stocks, bonds, commodities, and even cryptocurrencies. This wide range means that you can spread your investments around, which is a good way to manage risk.

Back in the day, trading used to happen in person or over a phone call with brokers at physical locations. But now, things have shifted mostly to the online world in the form of brokerage accounts. This shift to online trading platforms has made it even easier for regular people to get involved and has made trading more transparent. Of course, regular living brokers still exist, but they mostly take the role of advisors and property managers.

How Brokers Make Money?

Now that we familiarized ourselves with retail brokers, let's briefly examine their business model and how they make money. One of the main ways retail brokers make their money is by charging fees for each trade you make. These fees are either a set amount per trade, or they might come in the form of spreads, which is the difference between the buying and selling price of an investment. This way of charging is pretty simple and upfront, making it a good option for beginners who are new to trading.

A good thing is that brokers usually don't charge percentage fees from your portfolio or your profits. This is something that for example a mutual fund or other custodian service might do and it usually results in much higher overall fees paid.

Prop Trading Firms - New Opportunities and Fast Scaling

Proprietary trading firms, more commonly known as 'prop firms', operate a bit differently than what you might expect if you're familiar with traditional brokers. Unlike a conventional broker, a prop firm invests its own money, effectively acting as both the broker and the client. The traders employed by prop firms, often referred to as prop traders, don't risk their own capital but instead use the firm's money to trade. These firms have gained considerable popularity over recent years, offering a different pathway for traders to step into the financial markets.

Initial requirements: If you register with a retail broker you can start trading right away, but you will need to own some starting capital. Prop trading firms have it exactly in the opposite way - traders do not need their capital, because it is provided by the firm. They do, however, need to get evaluated to work with the capital. This is usually done by completing a series of tests and challenges, demonstrating the trader's profitability and consistency.

Leverage and Capital: To start with, prop firms are more flexible in many ways compared to retail brokers. They are known for providing high levels of leverage, which can increase your buying power. Since the firm provides its own capital, it can be more risk-averse, but usually tries to push the traders to higher profits.

Fees: In terms of fees, prop firms typically have a different structure than retail brokers. Instead of charging a flat fee per trade, they often use a per-share structure, which means the more you trade, the lower your fees. This can be a big advantage if you're planning on trading frequently or in large volumes.

One of the major fees that you will not find with a retail broker is the initial ticket you pay to enter the evaluation challenge. Although this fee is usually refundable once the trader passes the challenge.

Tools and Resources: When it comes to tools and resources, prop firms often provide access to more advanced software and real-time market data compared to retail brokers. Additionally, many prop firms run their own training programs for traders, since the firm's success is directly tied to the trader's performance.

If you are wondering how to choose the right prop firm for you, check out our summary of the Top 5 best prop trading firms on the market in 2023.

Choosing Based on Your Trading Style

To help you choose the right platform we have created a table listing the main important aspects when comparing retail brokers with prop trading firms. 

Aspect Retail Brokers Prop Trading Firms
Capital Traders use their own capital. In some cases could not be sufficient to make a living. Large capital provided by the prop firm. Possibility of high profits.
Risk A trader is fully responsible for the risk he/she takes and carries consequences. A Trader may be partially exposed to the risk or not at all. Usually, the prop firm carries the risk and consequences.
Reward The whole profit belongs to the trader. No external conditions to follow. The prop firm is entitled to a certain percentage of the profit. This varies from firm to firm.
Starting Conditions No special requirements apart from a brokerage account and some starting capital.

Traders have to complete challenges to become eligible and also get verified.

Tools and Resources Basic tools and indicators available freely. The majority of the high-quality trading tools either require paid subscriptions or coding knowledge. 

The prop firm provides top analytical trading tools and educational resources to ensure maximum profitability of the traders.

Flexibility Traders may execute whatever transactions they like. No conditions to bind them apart from the exchange.

Prop firms often do not allow overly risky strategies to protect their capital. Traders are bound to a certain extent.

Generally, if you are deciding between retail brokerage and a prop trading account, it is a good strategy to evaluate your goals in this field. Are you a complete beginner wanting to invest some money long-term, or are you a semi-professional trader with years of experience? 

Retail brokers are suitable for the great majority of traders and investors ranging from complete beginners to experienced traders. Prop trading accounts offer unique possibilities for traders that seek to scale their profits and skills, but do not have their own capital yet - in this regard, a prop trading firm could become a valued partner.

Disclaimer: This article is a paid release. neither endorses nor takes responsibility for the content, accuracy, quality, advertising, products, or other materials on this page. Readers are advised to conduct their own research before making any decisions related to the company. is not liable, either directly or indirectly, for any damage or loss incurred from the use of or reliance on any content, goods, or services mentioned in this article release.

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