How do prop firms make money? (2024)

prop firms are referred to as proprietary trading firms In the financial industry, a prop firm is known as a means for individuals to trade financial products. These businesses operate in many markets, including bonds, stocks, commodities, and currencies.

Instead of trading on behalf of clients, they use their cash to carry out transactions. People keep wondering how do prop firms make money, since Profit generation is a prop firm sole purpose, just like it is for any other business, these businesses make money through a mix of profit-sharing plans, membership fees, and challenge fees.

How do prop firms make money? (1)

Traders must pass the exam to become a member of a prop business and pay fees in exchange for the right to use the firm's funds for trading. Traders split their gains with the company if they are profitable. Prop companies also gain from keeping the challenge costs paid by traders who fail the test.

This article aims to provide readers with a better understanding of how prop firms make money through different business strategies by examining its numerous revenue streams.

How do prop firms make money?

Prop firms just like every other firm aim to make money, there are different ways in which prop firms make money and they are listed below;

The challenge Model

Prop firms that offer a challenge model typically make money through the fees that they charge for the challenge itself. These fees can vary widely depending on the prop firm but are typically a few hundred dollars or more. In a typical challenge model, the prop firm will give the trader a certain amount of virtual money to trade with.

The trader will then have to meet certain profit targets in order to pass the challenge. Once they pass the challenge, they will be given a funded account that they can use to trade with real money. This model is designed to allow the prop firm to make money while also giving traders an opportunity to prove themselves and earn a funded account.

Prop firms earn money when a trader fails the challenge. In reality, the prop firm will never refund the fees to traders who failed the challenge because it is in their best interest for the majority of traders to fail. Although it doesn't seem to be the standard in other industries, this is how most prop firms operate.

Some prop firms are aware that 90% of traders will not be able to comply with the strict rules, and are influenced to develop extremely tough trading conditions to profit from traders who fail the challenge.

Profit sharing plans

Traders that make it through the evaluation phase join profit-sharing agreements with the prop firms. Depending on the particular program and firm, there are differences in how the trader and the firm split the profit. At first, the company usually takes a bigger cut of the profits, often up to 70% or more.

Top prop trading companies, on the other hand, might provide traders with more advantageous profit splits, like 80% or 90%, but these schemes might come with more upfront expenses. Traders can bargain for a higher portion of the profits as long as they meet targets and follow risk management procedures.

It is typical to move from an 80/20 split to a 90/10 split or from a 50/50 split to a 25/75 split. The percentage of profits that a prop firm takes can vary, but it is usually somewhere between 10-50%. So, for example, if a trader makes $10,000 in profits, the prop firm might take a 30% cut, leaving the trader with $7,000.

Membership fees

Membership fees provide prop firms with a steady stream of revenue that is not dependent on the performance of their traders. This is important because it gives the firm a reliable source of income that can be used to cover expenses such as rent, utilities, salaries, and other costs.

It also allows the firm to reinvest in its business, such as by developing new trading platforms or expanding its research and development capabilities. Additionally, membership fees help to cover the cost of providing support to traders, such as educational resources and customer service. All of these factors contribute to the overall profitability of a prop firm.

Additionally, traders are required to pay the membership fees monthly or annually to the prop trading firm to renew their membership. The agreement between the trader and the firm may be terminated if this fee is not paid. Therefore, while assessing the profit from trading with the prop firm, traders must take the effect of the membership fee into account.

Educational fees

Educational fees are another source of income for many prop firms. These fees are charged for things like online courses, webinars, mentorship programs, and other educational resources that traders can use to improve their trading skills.

While some of these resources may be free, many prop firms offer premium content that requires a fee. This educational content can range from basic trading strategies to more advanced topics like market analysis and risk management. By charging for this educational content, prop firms can make money while also providing a valuable service to their traders.


Most prop firms also make money through commissions, which are fees that are charged for each trade that is executed. These commissions are usually paid to the broker that executes the trade, and then a portion of those commissions is passed on to the prop firm.

The exact amount of the commission varies depending on the type of trade, the size of the trade, and the specific broker that is used. For example, a prop firm might charge a commission of $1 per contract for stock options, while futures contracts might have a commission of $3 per contract. These commissions add up over time, and they may not be significant but they also add to the prop firm's source of income.

Interest-on-margin loans

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prop firms also make money through interest-on-margin loans. Margin loans are loans that are given to traders so that they can make larger trades than they would be able to with their own capital. These loans are secured by the securities in the trader's account, and they are typically offered at interest rates that are higher than traditional loans.

For example, a trader might be able to borrow $50,000 with a margin loan, but they would be charged an interest rate of 10% or more depending on the agreement between the trader and the firm. The prop firm then earns money by collecting interest on the loan.

Frequently Asked Questions

What percentage do prop firms take?

  • The percentage that a prop firm takes varies from firm to firm, but it typically ranges from 20-50%. This also depends on the rules set by the prop firms

Do prop firms payout?

  • Yes. Prop firms do pay out, but the amount of money that a trader can make will depend on their performance and the terms of their agreement with the firm.

Where do forex prop firms get their money?

  • Forex prop firms get their money from a variety of sources, including:

  1. - The commissions they earn on trades
  2. - The interest they earn on margin loans
  3. - The fees they charge for educational content and other services
  4. - The performance fees they collect from profitable traders

What is the risk of prop trading?

The risk of prop trading is that you could lose money, just like any other type of trading. The amount of risk varies depending on the specific firm and the strategies they use, but most prop firms have systems in place for risk management

How does Prop firm work?

The way that prop firms work is by giving traders access to capital and trading platforms in exchange for a percentage of the profits they make. This arrangement benefits both the trader and the firm, as it allows the trader to make larger trades and gives the firm a share of the profits. Many prop firms also provide education and training to help their traders become more successful.

How do prop firms make money? (2024)


How do prop firms make money? ›

Prop firms fund traders to earn a share of their profits, which constitutes a major part of their revenue, and may also gain income through subscription, joining fees, and selling educational courses.

How much do prop firm owners make? ›

In conclusion, the income of prop firm traders can vary greatly depending on several factors such as experience, performance, and the size of the firm. On average, a junior prop trader can expect to earn anywhere between $50,000 to $100,000 per year, while a senior trader can make upwards of $500,000 annually.

What percentage do prop firms take? ›

The percentage of profits that a prop firm takes can vary, but it is usually somewhere between 10-50%. So, for example, if a trader makes $10,000 in profits, the prop firm might take a 30% cut, leaving the trader with $7,000.

What are the negatives of prop firms? ›

- Traders in prop firms often have limited control over the firm's capital. They may need to deposit their own money as collateral or risk management. - Additionally, payouts are subject to the firm's rules, which may restrict a trader's access to profits.

Why do prop traders make so much money? ›

Prop traders make all or most of their income from splitting profits they generate in financial markets with the prop firm that provides them with capital. Prop traders face the same challenges as other traders but benefit from access to capital, technology, and interaction with other skilled traders.

What happens if you lose prop firm money? ›

Proprietary trading firms often provide evaluation accounts where you prove your trading skills. Usually, you pay a one-time fee to enter this "challenge." If you lose money during this evaluation, you won't owe anything beyond the initial fee.

How many people fail prop firms? ›

Around 10% pass

According to FTMO statistics, only about 10% of traders are able to pass the funded account challenge at any account level. This means approximately 90% of aspiring funded traders fail the evaluation and are unable to gain access to the firm's capital.

Is Prop firm worth it? ›

In my experience, trading with prop firms like True Forex Funds has been incredibly profitable. Over the past 1.5 years, I've seen substantial gains, and their support and spreads have played a crucial role in my success. Definitely worth it!

Do you have to pay back prop firms? ›

When you are trading with a prop firm, your losses are usually limited to the foregone risk of your challenge/account fee. You are generally not liable for the prop firm's lost funds.

What are the risks of prop firms? ›

The Risks Associated With Trading With A Prop Firm

Additionally, prop firms often require their traders to put up a significant amount of money as collateral, which can be lost if the trader is unsuccessful.

Are prop firms a pyramid? ›

There is a very slim likelihood that they will succeed if the prop firm does not have their best interests in mind. Actually, one could compare the 95% of prop companies to a pyramid scheme. They either set you up to fail or compensate you with other traders' losses.

Why is prop trading illegal? ›

The Volcker Rule is one of the more controversial pieces of legislation to emerge from the financial crisis. Attached to the Dodd-Frank Act, the rule was intended to limit banks' ability to make speculative investments that do not benefit their customers.

Do prop firms give you real money? ›

Sure, the firm may replicate successful trades of the funded traders on the firm's real account. But, again, those are trades made by the firm itself with its own capital. And in general, prop firms insist that they are not financial institutions and do not provide financial services.

Why are prop firms getting shut down? ›

Prop trading firms have been shutting down or suspending their services, particularly to U.S.-based clients, because of a crackdown from MetaQuotes, the company behind the popular MetaTrader trading platforms.

How much capital is needed to start a prop firm? ›

How much money do you need to open a prop firm? Starting an online prop firm can cost as little as $10,000, while starting a traditional prop firm can cost up to $1 million.

Can you make a living trading for a prop firm? ›

Also known as “prop trading,” it offers higher earnings potential much earlier in your career than jobs like investment banking or private equity. It's arguably the most merit-based industry within finance: if you make millions of dollars for your firm, you'll earn some percentage of it.

Can you make money from prop firms? ›

Also known as “prop trading,” it offers higher earnings potential much earlier in your career than jobs like investment banking or private equity. It's arguably the most merit-based industry within finance: if you make millions of dollars for your firm, you'll earn some percentage of it.

How profitable is prop trading? ›

Unlike when acting as a broker and earning commissions, the firm enjoys 100% of the profits from prop trading. As a proprietary trader, the bank enjoys maximum benefits from the trade. Another benefit of proprietary trading is that a firm can stock an inventory of securities for future use.

How much money do you need to open a prop firm? ›

To summarize, the amount of money you need to open a prop firm can range from $10,000 to $1 million, depending on the type of prop firm, the technology, the registration, the liquidity, and the CRM tool.

What is the profit split for prop firms? ›

Profit share: Frequently ranges from 50% to 90%, depending on the firm's policy. Trading capital: Can scale up based on the trader's performance. Trading guidelines: Including restrictions on instruments, maximum positions, and strategies.

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