Prop Trading vs. Personal Trading: Pros, Cons, and Which Is Better for You

In the world of financial trading, traders can operate following two main paths:

1. Proprietary Trading (Prop Trading) – Working with a proprietary trading company (prop firm), which provides the necessary capital to trade in the markets.
2. Personal Account Trading – Using one's own capital to trade financial instruments, taking on all the risk and profits.

Both options offer advantages and disadvantages, and the choice depends on a series of key factors, including available capital, risk tolerance, trading experience, and personal financial goals. Some traders prefer prop trading for greater access to leverage and company capital, while others choose trading with a personal account to have full control over their operations. In this article, we will analyze in detail the main characteristics, benefits, and challenges of both alternatives, helping you determine which model may be more suitable for your trading needs.

What is Prop Trading?

Proprietary trading (prop trading) is a trading method where a company uses its own capital to trade financial instruments with the goal of generating profits. Unlike retail traders who operate with their own money, traders working for a prop firm access company capital, benefiting from greater liquidity and often more favorable market conditions. Prop trading companies can include:

• Investment banks and hedge funds that use prop trading as an internal source of profitability.
• Brokerage firms that trade with their capital on stocks, derivatives, currencies, and other assets.
• Specialized proprietary trading firms that offer opportunities to individual traders, allowing them to trade in exchange for a share of the generated profits.

Why Does Prop Trading Exist?

Prop trading serves several strategic functions for financial institutions and independent traders:

• Autonomous profit center – Companies use their own capital to obtain direct gains from the markets without relying on commissions generated by clients.
• Liquidity accumulation – Some institutions use prop trading to acquire positions in financial instruments to offer market-making services or facilitate operations for their clients later.
• Access to trading with reduced capital – Prop firms allow individual traders to operate with a lower amount of money than required by retail brokers, bypassing leverage restrictions and improving their market exposure.

Many prop firms offer traders advanced platforms with technical and algorithmic analysis tools, high execution speeds, and reduced trading commissions. However, accessing a prop firm often requires passing an evaluation test to demonstrate one's trading skills. The conditions offered by each prop firm can vary: some impose a security deposit, while others provide risk capital without any initial investment. In any case, profits are generally split between the trader and the company, with percentages ranging from 50% to 90% in favor of the trader.

What is Personal Account Trading?

Personal account trading, or retail trading, is a form of trading where an individual uses their own funds exclusively to trade financial instruments such as stocks, futures, forex, and options. This approach is the most common among independent traders and retail investors who operate through online brokers and regulated trading platforms. Unlike proprietary trading, retail traders must manage their own risk entirely and have more limited access to leverage. Regulations imposed by financial authorities, such as the SEC in the United States or ESMA in Europe, provide stricter rules on margins and leverage to protect investors from excessive risk. A significant advantage of trading with a personal account is operational freedom: the trader can adopt any strategy without constraints imposed by a prop firm. Additionally, all generated profits remain entirely with the trader, without having to share a percentage with the company. However, the main disadvantage is represented by limited capital: to operate on a large scale, a retail trader must have significant personal capital, which can represent a barrier to entry for many investors.

Prop Trading vs. Personal Account: Pros and Cons

Advantages of Prop Trading

• Greater trading capital: ability to trade with company funds without having to deposit large sums of money.
• Reduced commissions: prop firms often offer lower fees compared to retail brokers.
• Support and training: access to educational material, advanced strategies, and mentorship.

Disadvantages of Prop Trading

• Obligation to split profits: gains are shared with the prop firm.
• Rules and limitations: some prop firms impose restrictions on high-risk trading strategies.

Advantages of Personal Account Trading

• Total autonomy: full freedom in trading decisions.
• Unshared profits: all gains belong to the trader.

Disadvantages of Personal Account Trading

• Limited capital: need to operate only with one's own funds.
• Greater personal risk: in case of losses, there is no prop firm to absorb part of the risk.

Differences Between Futures Prop Trading and CFD Prop Trading

Prop trading is not a uniform model and can vary significantly depending on the financial instruments used. Two of the main categories of prop firms are those that operate with futures and those that offer CFDs (Contracts for Difference). Although both instruments are derivatives and allow speculating on the price movements of underlying assets, they present significant differences in terms of regulation, market structure, costs, and risk.

1. Market Structure and Regulation

• Futures: Futures are standardized contracts traded on regulated exchanges such as the Chicago Mercantile Exchange (CME) or the Intercontinental Exchange (ICE). Trading takes place with total transparency, as prices and trading volumes are public. Furthermore, futures prop firms operate through centralized clearing houses, reducing counterparty risk.
• CFDs: CFDs are Over-the-Counter (OTC) instruments, meaning they are not traded on a centralized market but directly with a broker or liquidity provider. This means that the broker acts as the trader's counterparty, determining spreads, margins, and execution conditions. In some cases, the lack of regulation can expose traders to risks of price manipulation or broker insolvency.

2. Leverage and Margin

• Futures: Margins in futures are imposed by exchanges and vary based on the asset's volatility. Leverage is generally lower compared to CFDs and follows regulated standards.
• CFDs: In CFDs, leverage is determined by the broker, which means some offer much higher leverage compared to futures, often up to 1:100 or more. However, higher leverage can translate into greater risks, especially in volatile market conditions.

3. Costs and Commissions

• Futures: Trading costs are generally transparent and include fixed commissions per contract, in addition to exchange and clearing costs. There are no hidden spreads, as the trader buys and sells directly in the regulated market.
• CFDs: CFD brokers primarily earn through the spread, which is the difference between the buy and sell price. Additionally, many CFD brokers apply overnight commissions (swaps) for positions held beyond the trading day, increasing long-term costs.

4. Counterparty Risk

• Futures: Since the futures market operates through a clearing house, counterparty risk is practically non-existent. If a party is unable to fulfill its obligations, the exchange takes charge of the transactions.
• CFDs: In CFDs, the counterparty is directly the broker. If the broker fails or operates improperly, traders may not be able to withdraw their funds or close positions fairly. For this reason, choosing a reputable broker is crucial.

5. Market Access

• Futures: Futures are traded in a highly regulated environment and provide direct market access (DMA), allowing traders to see the order book and obtain transparent executions.
• CFDs: Some CFD brokers offer DMA, but most traders do not have direct market access. The price of a CFD may differ from that of the underlying asset, especially during periods of low liquidity.

Which Prop Trading is Better: Futures or CFDs?

The choice between a prop firm that operates on futures and one that offers CFDs depends on the trader's preferences and the adopted strategy:

• If you seek greater transparency, regulation, and protection from counterparty risk, prop trading on futures is the best option.
• If you prefer facilitated market access, higher leverage, and lower initial costs, prop trading on CFDs may be more accessible, but with additional risks.

In any case, traders should carefully consider the pros and cons of each approach and choose a reliable and well-regulated prop firm.

Conclusion

The choice between prop trading and trading with a personal account depends on multiple factors, including access to capital, risk tolerance, operational autonomy, and each trader's financial goals.

Proprietary trading offers significant advantages, such as access to higher capital, lower transaction costs, and greater leverage. However, it also involves limitations: the need to share profits with the prop firm, compliance with company-imposed rules, and dependence on the financial stability of the firm. Additionally, the risk of fraud and the potential failure of the prop firm are elements to consider carefully.

On the other hand, trading with a personal account ensures full control over strategies and trading decisions, as well as unshared profits. However, it requires greater initial capital, offers more limited leverage, and can be more expensive in terms of trading commissions.

What is the best choice?

• If you seek greater access to capital and are willing to comply with rules imposed by the prop firm, prop trading can represent an excellent opportunity, especially for those with a solid strategy but reduced personal capital.
• If you prefer having full control over your trading and have the necessary capital to operate independently, trading with a personal account may be the safest and most flexible choice in the long run.