What is a Prop Firm? A Beginner's Guide to Proprietary Trading (2025)

What is a Prop Firm?

A prop firm (short for proprietary trading firm) is a company that provides traders with capital to trade financial markets. Instead of risking your own money, you trade the firm's capital and share the profits—typically keeping 80-90% of what you earn.

If you've ever wondered "what is a prop firm?" and whether it's right for you, this comprehensive guide covers everything you need to know about proprietary trading in 2025.

Proprietary trading (or "prop trading") occurs when a financial firm trades stocks, bonds, currencies, commodities, or other financial instruments with its own money, rather than using clients' money, to make a profit for itself. This is fundamentally different from traditional brokerage firms that trade on behalf of clients.

When asking "what is a prop firm," it's important to understand that modern prop firms have evolved significantly. Today's retail prop firms allow individual traders to access institutional-level capital through evaluation programs, making professional trading accessible to anyone with skill and discipline.

How Do Prop Firms Work?

Understanding how prop firms work is essential before you start. Here's the typical process:

1. Evaluation Phase: You pay a small fee ($50-$300) to take a "challenge" or evaluation. You must reach a profit target (usually 6-10%) without hitting a drawdown limit.
2. Verification: Some firms have a second phase to prove consistency.
3. Funded Account: Once passed, you get a funded account where you can withdraw real profits.

The evaluation tests whether you can trade profitably while managing risk according to the firm's rules.

The Evaluation Structure

Most prop firm evaluations follow a similar structure. You'll typically need to reach a profit target (6-10% of account value) while staying within drawdown limits. Some firms use one-step evaluations where you pass a single challenge, while others require two phases.

The evaluation period can range from unlimited time to 30-60 days depending on the firm. During this time, you'll need to demonstrate consistent trading behavior and proper risk management.

Why Traders Choose Prop Firms

The prop firm model has exploded in popularity for several reasons. Understanding what is a prop firm's appeal helps explain why thousands of traders pursue funding every month.

Access to Capital: Trade with $50k, $100k, or even $300k accounts without risking your savings. Compare account sizes here.

Limited Risk: The most you can lose is the evaluation fee. You're not liable for trading losses on the firm's capital. This is a fundamental advantage that answers why traders ask "what is a prop firm" and then pursue funding.

High Profit Splits: Keep up to 90% of your earnings. Some firms like Apex Trader Funding offer 100% on your first $25,000.

Professional Trading Experience: Access institutional-grade platforms and tools like NinjaTrader and Tradovate.

No PDT Rule: Unlike personal accounts, prop firm accounts aren't subject to the Pattern Day Trader rule, giving you unlimited day trades.

Career Development Opportunities

Beyond immediate financial benefits, prop firms offer career development. Many successful prop traders eventually manage larger accounts, mentor other traders, or transition to institutional trading roles. Understanding what is a prop firm opens doors to a legitimate trading career path.

Types of Prop Firms

There are two main types of prop firms to understand when exploring what is a prop firm that fits your trading style:

Futures Prop Firms

Futures prop firms are among the most popular for retail traders:

• Trade on CME (ES, NQ, CL futures contracts)
• Use platforms like Rithmic, Tradovate, or NinjaTrader
• Often have lower evaluation costs
• Examples: Apex Trader Funding, Tradeify, FundedNext Futures

Futures prop firms typically offer more trader-friendly rules, including EOD (end-of-day) trailing drawdowns and no daily loss limits on some firms.

Forex/CFD Firms

Forex prop firms cater to currency traders:

• Trade currency pairs and indices via MetaTrader (MT4/MT5)
• Higher upfront costs but often simpler rules
• Examples: FTMO, Funding Pips

Read our complete Futures vs Forex Prop Firms comparison to decide which is right for you.

Understanding Prop Firm Evaluations

The evaluation (also called a "challenge" or "combine") is how prop firms test traders before giving them capital. Here's what to expect when learning what is a prop firm evaluation:

Learn how to pass your prop firm evaluation with proven strategies.

Common Evaluation Rules

When researching what is a prop firm that suits you, pay attention to these key rules:

• Trailing vs. Static Drawdown: Some firms use trailing drawdown that moves with your profits
• News Trading Restrictions: Many firms prohibit trading during high-impact news events
• Consistency Rules: Some firms require consistent daily performance
• Weekend Holding: Policies vary on holding positions over weekends

Is Prop Trading Right for You?

If you have a profitable strategy but lack capital to make meaningful returns, prop trading is an excellent option. However, it requires discipline—the drawdown limits are strict to protect the firm's capital.

The best candidates for prop trading are:

• Traders with a proven strategy (even if only on demo)
• Those who can follow strict risk management rules
• People looking to scale their trading without personal capital risk
• Anyone who wants to trade full-size contracts without $25k+ in personal capital

Who Should Avoid Prop Firms

Prop trading isn't for everyone. If you're still learning basic trading concepts, practice on demo accounts first. Those who struggle with emotional discipline or can't follow strict rules may find prop firm trading frustrating. It's important to honestly assess your readiness before investing in evaluations.

Getting Started with Prop Firms

Ready to explore what a prop firm can offer you? Here's your path forward:

1. Research firms: Compare the best futures prop firms to find one that matches your style
2. Understand the rules: Learn about trailing drawdown and daily limits
3. Practice first: Demo trade with prop firm rules before paying for an evaluation
4. Start small: Begin with a $25k-$50k account to learn the process
5. Scale up: Once funded, consider multiple accounts to increase income

Conclusion

A prop firm offers a unique opportunity to trade significant capital without risking your own money. Now that you understand what a prop firm is and how it works, you're ready to take the next step.

Whether you're a beginner or experienced trader, prop firms provide a path to professional trading with limited downside risk. The key is choosing the right firm, understanding the rules, and trading with discipline.

Ready to get started? Compare all prop firms or explore our prop trading guides to learn more.