1. What is Prop Trading?

Prop trading (short for proprietary trading) is when a financial firm or trader uses the company’s own money to trade stocks, bonds, currencies, or other financial instruments, instead of trading for clients.

– Goal: Make a profit for the firm.

– Risk: The firm takes the risk, but also keeps all the profits.

– Example: If a prop trading firm buys $1 million of a stock and it goes up 10%, the firm earns $100,000. If it goes down, the firm loses money.

Some prop traders are paid a salary plus a share of profits.

2. Difference Between Regular Trading and Prop Trading

| Feature | Regular Trading | Prop Trading | Money Used | Client money | Firm’s own money | Goal | Earn fees/commissions | Make profits for firm | Risk | Clients take most risk | Firm takes all risk | Potential Earnings | Limited by fees | Can be huge (or huge losses) |

Regular Trading:

– Trades with client money.

– Earn fees/commissions.

– Client bears most of the risk.

Prop Trading:

– Trades with firm’s own money.

– Goal is to make profits for the firm.

– Firm bears all risk.

3. How Prop Traders Make Money Day-to-Day

– Buying Low and Selling High

   – Buy undervalued assets, sell when price rises.

   – Example: Buy 1,000 shares at $50 → price rises to $55 → sell → $5,000 profit.

2. Short Selling

   – Sell borrowed shares, buy back later at a lower price.

   – Example: Short 500 shares at $100 → price drops to $90 → buy back → $5,000 profit.

3. Arbitrage

   – Exploit price differences across markets.

   – Example: Gold is $2,000/oz in NY, $2,010/oz in London → buy in NY, sell in London → $10 profit per ounce.

4. Market Making / Spreads

   – Provide liquidity and profit from the spread.

   – Example: Stock bid $50 / ask $50.10 → buy at $50, sell at $50.10 → $0.10 per share profit.

Extra Point:

– Prop traders often use leverage (borrowed money) to amplify profits—but losses can be large if trades go wrong.