An introduction to prop firms and funded trading
A prop firm provides a trading account backed by its own capital. Traders pay a fee for an evaluation and, upon passing, retain the majority of the profits generated.
The underlying principle
The term derives from proprietary trading. Prop firms seek traders capable of disciplined risk management. Rather than requiring a substantial deposit, they charge a single fee for an evaluation, known as the challenge.
The challenge is conducted on a demo account under defined conditions: a profit target and loss limits. A trader who reaches the target without breaching any rule receives a funded account and a share of profits, typically 80–90%.
The firm's business model
Most firms continue to operate simulated accounts after funding and pay profits from their own resources. Challenge fees constitute their principal revenue, since a large proportion of traders do not pass.
Selecting a firm with a dependable payout record is therefore paramount. Years of operation and Trustpilot ratings offer the most useful guidance.
Cost and exposure
The challenge fee represents the full extent of a trader's financial exposure; a failed account incurs no further liability. Many firms refund the fee with the first payout.
A $100,000 challenge generally costs between $300 and $650. Current pricing appears on our most affordable prop firms ranking.
Suitability
Prop trading suits those who follow a defined plan, size every position deliberately and can endure a run of losses without departing from their rules. Newer traders should first practise on a demo and review the most frequent errors.
Questions and answers
Is a prop firm a broker?
No. A broker safeguards client funds and executes orders. A prop firm sells an evaluation and shares the profits earned on its account.
Is it possible to lose more than the fee?
No. The maximum loss is the price of the challenge.