What is a prop firm?

UPDATED: April 1, 2025

BROUGHT BY: PROPFIRMBOOK

A prop firm, is a company that funds traders with its own capital, allowing them to trade the financial markets without using personal funds. Prop firms operate on a challenge-based model, where traders must pass an evaluation to qualify for funding.

How Prop Firms Work

Here’s a step-by-step breakdown of how prop firms work:

Evaluation Process – Traders must pass a challenge phase, which typically involves achieving specific profit targets while adhering to strict risk management rules.
Verification Phase – Some firms require an additional verification phase to confirm the trader’s consistency before funding them.
Funded Account – Once successful, traders receive a funded account where they can trade using the firm’s capital.
Profit Split – Traders share a percentage of their profits with the firm, often ranging from 70% to 90% in favor of the trader.

How Prop Firms Make Money

Prop firms primarily make money through challenge fees, which traders pay to attempt qualification for a funded trading account. Since only a small percentage of traders pass these prop firm challenges, the firm earns consistent revenue from failed attempts. While some prop firms also generate income through profit sharing, subscription services, and trading commissions, the challenge fees remain the biggest source of revenue, making proprietary trading firms a sustainable and highly profitable business model.

Why Are Prop Firms Popular

Prop firms have become increasingly popular among traders because they offer funded trading accounts without requiring large personal investments. By passing a prop firm challenge, traders can access significant trading capital and earn high profit splits, making it easier to scale their strategies. These firms also provide structured risk management, advanced trading tools, and the flexibility of remote trading, making them ideal for traders.

Benefits of Trading With a Prop Firm

Access to Significant Capital – Traders can scale their trading without needing large personal funds.
Reduced Personal Risk – Traders are not using their own money once funded, minimizing financial risks.
Skill Validation – Passing a challenge proves a trader’s discipline, risk management, and profitability.
Higher Profit Retention – Many firms offer high profit splits, allowing traders to keep most of their earnings.

Conclusion

A challenge-based prop firm can be an excellent opportunity for traders looking to scale their trading careers without risking significant personal capital. By understanding how these firms operate and what they expect from traders, you can determine whether proprietary trading is the right path for you. If you have strong risk management skills and a profitable trading strategy, joining a prop firm might be your gateway to financial success in the trading world.