Prop Firms, A New Solution to Capital Deprivation? (Part 2)

I want to talk about the difference prop-firm capital and investor capital, and what to expect when choosing any of the two options for capital

Prop-Firm Capital Vs Investor Capital

Which route is best when financial freedom is desired?

As traders before the existence of what is now known as the prop firms of today, the only ways a trader sourced capital to start trading was either through his own money or other people’s money.

Traders back then after they had learned how to trade and do their time back testing and paper/demo trading naturally looked to enter the financial market with real money, how they did this was either they had a job that brought income and the income they earned is put in the financial market, or they had to ask family and friends to fund their trading capital or ultimately sort out investors who were willing to enter into an agreement with a skilled trader and provide a relatively significant amount to start trading with. These were the ways before the prop firms came.

Although there were challenges to this approach, a trader might not have a good income to fund his trading career especially as the common teaching is that traders trade with what they can afford to lose and risk no more than 2 percent of their capital per trade, doing this can pose a limitation on the trader who has just 100dollars to lose as risking 2percent of that will get him nowhere in the nearest future. Even the challenge of finding an investor who is willing to agree with a skilled trader was ever prevalent as there were not many people ready to give money to just anyone to trade with especially if they are not familiar with your background or track record.

Needless to say, Prop-firms closed the bridge between a skilled trader and capital allocation, it provided the solution to getting a sizable capital amount as a trader. But we can’t avoid the advantages and disadvantages that both means of capital had in its true form.

Advantages of Investor Capital

More Freedom: well, depending on who invested in you whether someone you know or an accredited investor the freedom can be better than trading a prop-firm capital as certain people just don’t stress their trader and let them use their discretion for risk management and are just entirely profit-focused.

Flexible profit sharing: Depending on the agreement a trader has with his investor; their terms as regards how often they share profits can be more flexible than that of prop-firm which has official and restricted times profit is shared. You and your investor could split profits every time profit is made, weekly or monthly, the first two can’t be done with prop firms.

Disadvantages of Investor Capital

Disagreement between both parties: Depending on whether you and your investor penned down an official agreement there can be conflict between investor and trader based on money and this can end in a very ugly way resulting in legal fights and even violence, this is not prevalent in a prop-firm capital because there is a term and agreement that is signed.

High stress: Depending on the nature of your investor whether risk-averse or not he or she can put stress on you, as their personality may not align with your way of trading, and this can impede the progress of your trading and cause conflict between you and your investor.

This represents a few of the good and bad of investor capital as a guide for traders who still want to consider going through the investor capital route. Let’s look at the advantages and disadvantages of prop-firm capital.

Advantages of Prop-Firm Capital

Agreed Terms and Conditions: Before there is any trading involved a trader is expected and required to read carefully the terms and conditions of a prop-firm and decide whether he or she is ready to play by those rules, this results in no conflict if un-favorable outcomes eventually happen as opposed by investor capital because these are two humans dealing with each other especially with no penned agreement.

Not as much stress: There is no stress concerning failure as, if you lose a challenge account, it is your commitment fund that takes a hit or even if you lose a funded account there is no one who would hold you for lost funds and this brings peace to your trading psychology.

Disadvantages of Prop-Firm capital

Less Freedom: When it comes to trading prop-firm capital there are restrictions to risks and how you trade generally which might not blend well with your trading strategy as some traders thrive as high-risk takers risking 10 percent per trade and this kind of trading can’t be allowed within the prop-firm space.

Rigid Profit Sharing: Most prop-firms place a limit on how you withdraw profits as some only allow just 2 times in a month and some even once a month, this can put stress on a trader who needs urgent money to settle a debt or pay bill and has surpassed his withdrawal limit for the month, as opposed to investor capital where you appeal to your investor for an urgent withdrawal.

These are some of the advantages and disadvantages of investor capital and prop-firm capital, my purpose in talking about this is not to choose which is better but only to compare the two sources of capital for the reader to determine which route to follow based on what his personality fits with.

That is all for the week, Next week I would talk about the concluding parts of this article till then, Be safe!